Trade War

My newsletter on Trump's "Liberation Day" Tariffs

It should be no surprise to anyone Americans love our almighty dollar.

Perhaps more than any other nation on the planet, the United States has throughout our history most faithfully followed free-market principles and shunned heavy-handed state intervention. This policy has been an undeniable success, with the American financial system long considered the most stable in the world and the place where the rich and powerful overseas yearn to park their assets. The American Dollar, despite attempts by China, Japan, and the European Union to supplant it, has remained the final safe haven for foreign companies and governments to conduct international transactions. In other words, when the government moves out of the way, one can have confidence that nothing sudden will happen to their personal finances.

However, in certain circumstances, the mighty hand of Uncle Sam does not shy away from disrupting America’s free market paradigm. And with the sweeping so-called “Liberation Day” tariffs, AKA taxes almost every imported good, the Trump Administration has swung a major blow at the heart of our free-market economy.

Liberation Day is admittedly not the first occasion when the US Government has undertaken a dramatic intervention in the free market. In the 1930s, the Franklin Roosevelt Administration implemented massive public works programs to pull the nation out of the Great Depression. In 1952, Harry Truman attempted to take over parts of the steel industry when widespread labor strikes ground military production during the Korean War to a halt. When this attempt was blocked by the courts, Truman sued for peace. By the 1960s, large increases in both military and social spending led to an oversupply of dollars relative to the nation’s gold reserves. When the Bretton Woods System collapsed in 1971, the Nixon Administration administered the “Nixon Shock”, which ended the Gold Standard, instituted price controls, and ironically, raised tariffs on all foreign goods all to protect the stability of the Dollar. Finally, during the 2008-2009 Financial Crisis, both the Bush and the Obama Administrations bailed out large Wall Street banks then on the verge of collapse, establishing the precedent that the federal government would use any means necessary to protect institutions “too big to fail.”

So, what do all these interventions have in common? They were all implemented against the backdrop of a major economic or national security emergency. And that’s what makes the Trump Administration’s announcement of tariffs so surprising. While the American federal debt grew rapidly, by a staggering $2.67 trillion per year under the Biden Administration, there was no imminent financial crisis in the United States. Long-term, that’s a different story, and I applaud the administration’s attempt to cut waste in the federal bureaucracy. But President Trump sees our current situation, in particular regarding China, much differently:

“We have a $1 trillion trade deficit with China. Hundreds of billions of dollars a year we lose to China… A deficit is a loss. We’re going to have surpluses, or we’re, at worst, going to be breaking even. But China would be the worst in the group because the deficit is so big, and it’s not sustainable.”

In the President’s mind, emergency measures, legally invoked through the International Emergency Economic Powers Act of 1977, are the only option to stop bleeding trillions of dollars per year to China, Europe, Mexico, and our other trading partners— even if they unleash short-term economic chaos. After decades of foreign nations, starting with Japan and its aggressive business practices of the 1980s “stealing” American wealth and obliterating our domestic industrial base through trade surpluses, Trump sees a drastic and painful “operation,” as he calls it, as America’s only remedy to reclaim our economic strength. It doesn’t matter that neither most mainstream economists nor Wall Street believe that America’s trade deficits are a serious problem for the American economy. The President has been repeating the virtues of economic nationalism and protectionism since the 80s, and he’s not going to retreat now. In his own words, “Come make your product in America, and we will give you among the lowest taxes of any nation on Earth, “but if you don't make your product in America… you will have to pay a tariff.”

So, on an issue as polarizing and world-altering as a shift towards unadulterated economic nationalism, what is my conclusion?

Despite my overall concern with the tariff policy, I do have some sympathy with the administration’s arguments. I am well-aware you will probably never find a Buick or a Lincoln like the one I drive in Tokyo or Munich, yet we can find hundreds of Toyotas and BMWs on a daily basis whether we live in Detroit, Dallas, or Durango. The European Union in particular is a bureaucratic nightmare that seems determined to block American exports of anything through tariffs, VAT taxes (though not directly targeted at the United Sates), and outrageous red tape. These issues are why finding a consensus with them is going to be extraordinarily difficult, if not impossible. I also believe that raising tariffs on foreign goods are likely to have a marginally positive impact on domestic manufacturing, evidenced by Nissan’s recent U-turn at their plant in Smyrna, Tennessee.

On the flipside, many of my readers know that I have long held a bias towards the concept many conservatives often scorn as Globalism. While I strongly oppose attempts by organizations like the World Economic Forum and the United Nations to enable large-scale immigration and dismantle national cultures, my years studying for the National Geography Bee in New Mexico have engrained within me an understanding of the rest of the world of which I cannot simply let go. I will always be aware of what other nations see as their core national interests, and I believe our country has to at least acknowledge them while simultaneously protecting our own interests. Thus, it is going to be challenging, more like impossible, for me to ever jump fully onboard with Trump’s economic nationalism. My reasoning goes far beyond temporary dips in the stock market.

I sincerely believe that nations have an obligation to work out their differences through multilateral forums and mutual compromise. I also believe America is stronger when we stick with our allies. China is a massive problem, which is why the United States would be better served confronting it in concert with Canada, Japan, and even Europe, despite my deep concerns about them. Most unfortunately, the America First worldview makes such an alliance impossible. This principle extends even to an area as complicated as international trade law, a subject I admittedly have not studied much. What I do know, however, is that unless the United States wants to abandon the dollar dominance I so wholeheartedly support, we have little choice but to accept the sort of trade deficits Donald Trump hates.

Because there is so much global demand for dollars, the value of our currency is automatically going to be higher than the Euro, Yen, Renminbi, Peso, or any other currency out there. And that dynamic in turn makes American exports more expensive on the international market than Chinese, German, or Vietnamese exports. Only a massive global sell-off of the dollar, an outcome I believe no one in this country wants to see, can alter these otherwise unalterable financial realities. And the financial world is where my biggest complaint about the Trump Administration’s tariff policy arises. With contradictory policy statements and walk-backs, the United States financial system is no longer the safe haven it used to be. When one doesn’t have any certainty about what our government will do next, why would you invest in a Treasury bond when you can instead invest in Gold, Crypto, Cash, or even some foreign asset?

Thanks to the botched execution of Liberation Day, the reliability of the United States as a safe investment has been damaged. Some extra manufacturing investments here are unfortunately not going to change this new reality. Likewise, I have heard countless stories of the chaos and uncertainty this trade war has unleashed, including in my own backyard. Instead of developing and implementing a strategic and thoughtful action plan regarding China’s economic predation in concert with Canada, Europe, Japan, and other countries, the Trump Administration is barreling towards making enemies out of every country in the world. And this misguided policy, I fear, is only going to make China, our most dangerous enemy, even stronger, and our beloved dollar… weaker.