Whether tariffs are good or bad depends entirely on one thing: the skin colour of who imposes them.
And orange is bad.
At least, so the intelligentsia would have it.
President Trump has gone to absurd lengths to make it clear that his tariffs are two things: reciprocal and less than those other countries impose on American goods.
This is designed to put the media and foreign leaders in a conundrum. If they oppose Trump’s tariffs, they expose their own hypocrisy. After all, Trump is only giving the world a taste of their own medicine. At only half the dose.
Watching the media struggle with this has been immensely amusing. Trying to claim that tariffs are good unless Trump is the one imposing them is really tough to explain.
It’s also important to note that Trump gave countries time and incentives to avoid the tariffs by agreeing to lower their own trade barriers first. Some nations got off better than others as a result.
But it’s not all one-way traffic for the MAGA camp. They do have a contradiction of their own to chew on…
Hypocrisy or a negotiation tactic?
Either tariffs are good economic policy, or Trump is secretly pro-free trade and merely using tariffs as a weapon to break down other countries’ trade barriers.
Both arguments are vaguely plausible. But they cannot both be true at the same time.
And yet Trump’s supporters flutter between the two claims effortlessly. One day they’re pro-tariff. The next they admit tariffs are bad, but that Trump is actually trying to lower them.
Trump certainly has a lot of history of using reverse psychology on his political opponents.
He wanted Europe to begin paying for its own defence, as required under NATO commitments. When they dragged their heals, he threatened to leave NATO.
The reverse psychology worked. The EU is now pitching an eye watering defence spending boom as an act of defiance against Trump. Even though it’s precisely what he wanted in the first place!
Similarly, Trump has positioned Europe to be pro-war over Ukraine. All he had to do was come out as pro-peace and the Europeans fell into his trap. The US benefits from the war by selling more American arms and gas at frighteningly high prices to the EU market.
Peace is more in the EU’s interest than anyone else’s. Some top German politicians are even openly admitting that their economy needs Russian gas. And if Trump secures peace now, the EU will be humiliated.
So, perhaps Trump’s trade war is really about forcing other countries to lower their barriers by exposing how painful they have been to the US economy.
We may be on the cusp of a boom in world trade, not a contraction. Perhaps Trump’s unusual negotiation tactic of threatening countries with their own trade policies really will crack the nut of EU, Japanese and Chinese trade barriers.
I can’t think of any historical examples when a nation used trade barriers as a weapon to try and force other countries to lower their barriers. It’s a fascinating idea. But it’s not the only possibility.
It’s no longer the economy, stupid
The opposite possibility is that there are now more important things than economic growth and prosperity. You could even call them pre-conditions for prosperity.
For example, having a defence force is a complete waste of resources. The country would be much better off without one in so many ways. But without one, you might not have a country at all.
The question is what else gets classified in that category of being a pre-condition of having a secure country. Do you need to produce enough of your own resources? Your own energy? Steel? Defence industry? Food?
Every country answers that question differently. Some don’t even bother with a defence force.
Perhaps what we are experiencing is a genuine shift in what nations consider to be more important than prosperity. For decades, we were happy to be inter-reliant and rich. Now we want to be secure, even if it makes us poorer. Tariffs are a tool to achieve this.
This is a sadder state of affairs than is obvious at first. The gains from trade are not appreciated or understood by voters. A crucial lesson of economics is that any constraint to trade does make you worse off…economically.
Perhaps Trump is just reflecting that the way of thinking that has held sway in the EU, China and Japan has now arrived in the US. Tariffs to protect a country are now valid policy in the US too, not just the rest of the world.
After all, the EU, Japan and China have been using unfair trade practices including tariffs for decades. Heck, that’s how the EU came into existence.
What goes up in a trade war?
The conundrum for investors is fairly obvious. If we don’t know whether Trump is actually pro-tariff or pro-free trade, we don’t know how to position our portfolios. For example, should you be buying US car companies?
Well, as strange as it may seem, US industry may be a good investment regardless of the outcome. If Trump is merely giving countries a dose of their own tariff medicine, governments around the world will be forced to lower their tariffs on US goods. US exports could jump.
If Trump is really trying to protect US industry from foreign competition, as other countries already do, US manufacturers will become more competitive within the US thanks to tariffs on foreign goods. It’s sort of a win-win for US industry.
Bloomberg reports that boom may have begun already. ‘US Manufacturing Activity Expands for First Time Since 2022’ as the ‘ISM January factory index increases 1.7 points to 50.9’ with the ‘orders gauge highest since May 2022, production also firms’.
It’s not like the US, China, Japan or South Korea became industrial giants without serious trade barriers…
While US industry is likely to benefit either way in the long run, Australia’s fate is more binary.
If Trump is trying to crack the nut of free trade open, our economy would benefit from the economic boom that would result. More trade would use more of our resources.
If this is the beginning of a trade war, we are in trouble. As a global resources producer that feeds China’s furnaces and factories with their fuel and materials, our economy faces an uncertain future. Can our exports simply be redirected to the US industrial machine instead?
Perhaps, but there would be less demand.
Let’s hope world leaders agree to cut their tariffs in exchange for a reprieve from Trump’s new tariffs. Then we may never have to find out what a proper trade war would look like.
But if you expect this bust-up to continue, then there’s only one place to look for a boom worth investing in.
Regards,
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Nick Hubble,
Editor, Strategic Intelligence Australia
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