“Stupidity is a more dangerous enemy of the good than malice. One may protest against evil; it can be exposed and, if need be, prevented by use of force. Evil always carries within itself the germ of its own subversion in that it leaves behind in human beings at least a sense of unease.
Against stupidity we are defenseless. Neither protests nor the use of force accomplish anything here; reasons fall on deaf ears; facts that contradict one’s prejudgment simply need not be believed – in such moments the stupid person even becomes critical – and when facts are irrefutable they are just pushed aside as inconsequential, as incidental.
In all this the stupid person, in contrast to the malicious one, is utterly self-satisfied and, being easily irritated, becomes dangerous by going on the attack. For that reason, greater caution is called for when dealing with a stupid person than with a malicious one. Never again will we try to persuade the stupid person with reasons, for it is senseless and dangerous.”
- Dietrich Bonhoeffer, Letters and Papers from Prison
I expected Trump 2.0 to result in more dramatic and obvious consequences than Trump 1.0, and indeed this has been my main source of hope (believing that this is what it’ll take to convince a durable majority of Americans that personality-cult populism was a bad idea), but this is happening faster than even I anticipated. It’s honestly hard to really comprehend just how incredibly stupid this whole tariff business is.
For a start, these tariffs are not “reciprocal” as Trump claimed. He described them as based on a sophisticated analysis of each country’s own trade barriers, currency manipulations, etc. toward us and thus calibrated to offset these artificial impediments to our exports. While such an approach would still be unnecessarily chaotic, it’d at least make some sense and be based on something our trading partners can realistically respond to. But the actual tariffs that were announced have basically nothing to do with other countries’ trade barriers. Instead, they’re based on the trade deficit we have with each country. I suppose anyone who’s listened to Trump over the years could have predicted this - after all, he’s been on a crusade against trade deficits for a long time. But his insistence that trade deficits are evidence that we’re being ripped off, as he likes to claim, makes no sense.
I have a major trade deficit with Amazon.com. I give them more money than I’d like to admit, and all I get in return is stuff. It’s so unfair, they never give me any money! Similarly, my employer has a trade deficit with me. They give me quite a lot of money, and all I give them back are my services. Ha, suckers! The idea that a trade deficit is inherently bad ignores the fact that it’s an exchange of valuables.
But even if you grant that there are negatives to a trade deficit, that doesn’t mean artificial trade barriers were the cause. After all, do I buy things from Amazon only because there’s some unfair impediment to me making those things myself? This isn’t to say trade barriers can’t contribute to trade deficits. If two countries have an equal desire to buy each other’s goods, but country A imposes large tariffs on country B’s exports in order to prop up their own domestic industry, this would cause country B to sell less of that thing and result in country A (unfairly) getting to sell relatively more things to country B. But the reverse is not true - a trade deficit is not in itself evidence of unfair trade practices and is not a remotely reasonable proxy for measuring this.
The 49% tariff announced on Cambodia illustrates this perfectly. It is based on a claimed 97% tariff they supposedly have on the US. In fact, Cambodia’s tariffs on the US average around 10-12% (and they use the US dollar interchangeably with their own, so currency manipulation doesn’t make sense either). But if the number is meant to reflect a trade deficit we have with Cambodia, particularly in absolute numbers (given the wild difference in size of the countries’ economies), it’s not so surprising. Cambodia produces lots of cheap clothing that Americans buy but is too small and poor to buy much of the higher-cost products America makes. So of course we have a trade deficit with them. This is a mutually beneficial thing - we don’t want to make cheap clothing in the US, so imposing high tariffs only makes Cambodia less competitive and makes stuff more expensive for American consumers. It also undermines our attempts to shift supply chains away from China by hurting the very countries we were trying to elevate.
It’s also worth noting the sheer incoherence of the administration’s messaging on why we're doing this. They’ve claimed that this will raise trillions of revenues for the U.S., enough to pay for tax cuts or even eliminate the income tax! And yet, they’ve also claimed the goal is to revitalize American manufacturers and encourage companies to make products here to avoid the tariffs. This is at odds with raising tariff revenue. Still others are claiming this is still just a bargaining tactic, in which case it will neither revitalize manufacturing (since the end result will be a net reduction in tariffs) nor raise tariff revenue (but would lower costs for consumers and expand the market for American goods). Which is it? Who knows. (Also worth noting that they’re not even trying to make the argument that this is intended to shore up strategic industries to hedge against geopolitical risk - one of the few justifications many economists will grant - because such tariffs must be targeted to specific countries and industries to be effective, and these are not).
The uncertainty is paralyzing for companies trying to decide whether they need to make changes to supply chains or invest in factories. If it’s all a bluff, they should hang tight. But if it’s for real, maybe they’ll consider making long-term investments here, but how can they be sure? This policy is constantly changing and even the messaging this week has been all over the place, including by Trump himself who in the span of a few hours went from saying:
“The tariffs give us great power to negotiate. They always have.”
to:
“TO THE MANY INVESTORS COMING INTO THE UNITED STATES AND INVESTING MASSIVE AMOUNTS OF MONEY, MY POLICIES WILL NEVER CHANGE.”
to:
“Just had a very productive call with To Lam, General Secretary of the Communist Party of Vietnam, who told me that Vietnam wants to cut their Tariffs down to ZERO if they are able to make an agreement with the U.S. I thanked him on behalf of our Country, and said I look forward to a meeting in the near future.”
It can’t be both a rock-solid guarantee that should make investors confident in building in America, and a totally up-for-negotiation policy that can be revisited “in the near future.”
What companies and trading partners can learn from all of this, though, is that America is unreliable and unpredictable. It is therefore entirely reasonable for other countries to begin looking at ways of integrating more closely with each other and sidelining America, both by reducing their dependence on us for trade (in both directions) and building supply chains around us. In the stark words of Canadian PM Mark Carney:
Trump has said that “trade wars are good, and easy to win.” Just as he hasn’t ended the war in Ukraine in a day and his negotiated cease-fire in Gaza has failed, he may be finding that the world is more complex than he appreciated. In the case of trade, America may be strong and influential, but other countries have agency. You bully them long enough, eventually they’ll go find a new playground or team up against you.
There is finally some evidence that a few elected Republicans are making murmurs of concern, including Ted Cruz, though still far too little to do anything about it. It’s shameful that it took a stock market crash to wake them from their stupor, when gutting humanitarian aid, abusing the federal workforce and deporting people without due process did not. But just as Signalgate broke through to many in the military who saw it as a threat to their lives, this is breaking through to virtually everyone with a 401(k), or a business that relies on imports, or a business that relies on exports. The wild thing about these tariffs is basically nobody is immune:
If you are a manufacturer, your raw materials and parts are getting more expensive (drastically so if those parts cross the border multiple times in the course of being built, as is common in the automotive industry as Cruz noted in that reference above).
If you are an agricultural producer, your market is getting smaller (as countries impose retaliatory tariffs on the many products we’re net exporters of).
If you’re the oil and gas industry, demand for your products is likely to go down, both from trade barriers to our exports (we’ve been a net exporter of petroleum products since 2020) and decreased domestic consumer confidence.
If you’re an electrician or plumber, your supply costs are going up.
If you work in tech, your international competition is going to look more attractive to buyers outside the US, especially if other nations target tariffs on services, which the U.S. is a net exporter of.
If you’re a retailer or international goods importer, most of your products are getting more expensive, forcing you to take less profit or raise prices.
And of course, if you’re a consumer of almost anything, the prices of much of what you buy are likely to increase.
There may be a few domestic winners but it’s hard to identify them, as the broad-based negative stock market reaction seems to show. Foreign companies were already building more factories in the U.S. thanks to legislation like the Inflation Reduction and CHIPS acts which incentivized this with actual laws that they had reason to believe would remain in force for long enough to justify these long-term investments. But as described above, there’s no telling if these tariffs will be in force for days, months or years, to say nothing of whether they’ll survive the next administration. No smart business leader is going to commit to big long-term investments based on a tariff regime so lazily and irrationally constructed that the only logical explanation is that it must be intended as temporary leverage, not serious policy (despite Trump’s ALL-CAPS insistence to the contrary).
That it’s meant as temporary leverage is the best-case scenario, but unfortunately, I don’t think we can count on that. Trump has surrounded himself with people afraid to tell him things he doesn’t want to hear, and who say things like “let Donald Trump run the global economy. He knows what he’s doing.” That sure sounds like central planning, which is a hallmark of socialism and at odds with the free-market capitalism that was supposedly one of the main reasons to vote for these people. And let’s not forget that if he is serious about this policy and it does somehow result in a great renaissance in American manufacturing, there’s the small fact that protectionism has historically been terrible for economic prosperity.
I do expect Trump will back off on some of these more extreme tariffs, which will probably result in a temporary market rebound, but a full rollback seems unlikely given tariffs are one of the few things Trump seems to genuinely believe in. Even if this does end up getting largely unwound, the damage done to our reputation as a reliable trading partner, built over decades, will have lasting repercussions. And it will only continue the highly chaotic and unpredictable approach to trade policy based on the whims of one person who ignores the advice of experts, which will further suppress consumer confidence and economic investment. There’s a reason Congress was supposed to be in charge of tariff policy.
I hesitate to make predictions about the economy and stock market, but I have a hard time believing we’re not headed for a recession. How bad it’ll be will depend in part on how firm Trump stands on these tariffs, but this isn’t the only factor. The campaign of fear against immigrants is likely to not only cause labor shortages for domestic industries like agriculture and construction whose labor costs will go up, but also affect employers who will likely find it harder to hire or retain high-skilled H1-B visa holders who may fear deportation because of something they posted online. That may be good for some individuals (such as those who compete with them for work) but bad for those businesses and the broader economy. And let’s not forget that trade policy isn’t the only source of uncertainty these days - the utter chaos affecting almost everything the Federal government touches is going to have ripple effects, too.
In all, it sure sounds like a recipe for stagflation - inflation due to rising import costs and a smaller (more expensive) workforce, along with suppressed demand due to a recession caused by shrinking economic opportunity and dynamism. All in an economy that just six months ago The Economist called “the envy of the world.” Somehow, I don’t think this is what a plurality Americans thought they were voting for, and I wonder for how long they’ll keep trusting that this is part of a brilliant plan to “make America wealthy again.”