Trumps trade and tariff policy – ou can’t have your cake and eat it too

I am a logical person and have an issue when 1 + 1 doesn’t = 2. As I will explain, not only did the punitive reciprocal tariff rates sent shockwaves, through the markets and increased uncertainly in an uncertain market as to the real objective.

What is the White House game plan?

In a recent blog article I asked, What is the Trump reciprocal tariffs game plan?

• Is it to lower tariffs levied by either countries on U.S. export?
• Is it to raise revenue to fund tax cuts?
• Is it to bring manufacturing back to the U.S. as Trump and other officials have stated?

You can’t have your cake and eat it too

Lowering tariff rates on U.S. exports and raising revenue by implementing tariffs/encouraging manufacturing investment in the U.S. are incompatible.

Let me explain.

1) If reciprocal tariffs are cut to zero, then there is no revenue to be collected.

2) In order to raise revenue on the amount projected by the White House (e.g. $700 bln), high tariff rates need to stay on long term.

3) To encourage manufacturers to build plants in the U.S., high import tariffs need to remain.

There are other issues.

1) The high tariff rates are implemented by executive order and not by law. If I was a foreign manufacturer, would I be willing to make an investment based on higher tariff rates that could be pared back by the current administration or revers by another one?

2) I am far from an expert on manufacturing but have read that future plants could largely be automated, requiring fewer workers to run them. If this proves true, the would be construction jobs generated but how many jobs would be treated to run the plants. After all this is 2025 and not 1925.

3) Raising revenue through tariffs, which will presumably lead to higher prices and essentially a tax hike on all American consumers to be used to fund a government tax cut (I will leave this to a future discussion).

1+1 does not = 2

Lowering reciprocal tariff rates, while helping to contain inflation, will not produce the revenue to finance the tax cuts. On the other hand, while high tariff rates may encourage some manufacturers to build plants in the U.S. and raise revenue, it rises the risk of inflation, recession or stagflation.

Trump & Co, cannot have it both ways on trade policy. They may try to thread the needle between lower reciprocal tariff rates than those announced and keeping them high enough to bring in revenue and manufacturing. However, that is like trying to pull off an inside straight with the risk of having to fold too high for comfort.

Alternatively, if the goal is to bring in revene and manufacturing, it is not compatible with lowering reciprocal tariffs that do nit bring in enough revenue.

ADDENDUM (added after artice was ready to publish)

On Monday, the EU made what it saw as a bold concession to resolve some of the trade issues, zero for zero.

“We have offered zero-for-zero tariffs for industrial goods,” European Commission President Ursula von der Leyen said.

This would have lowered the price of drugs, autos and other U.S. exports to the EU.

The While House should have seen this as a success and hoisted a victory flag.

Instead, the proposal was dismissed out of hand. .It is not clear whether someone in the White House even picked up the phone.

This is another example of why I said 1 +1 doesn’t equal 2.

(note the  effective EU tariff rate on all U.S. exports is around 17%)

What is the game plan if not to level the playing field with lower tariff rates?

Are reciprocal tariffs a smokescreen for a more devious plan?

Whatever the case, there seems more to this tariff story to come.?

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