US Against The World - March 2025

Can Tariffs Make America Great Again?

The primary reason for a tariff is that it enables the exploitation of the domestic consumer by a process indistinguishable from sheer robbery. - Albert J. Nock

1. Intro

If we think about the last quarter, the most talked-about issue in global financial markets and economics was Trump’s tariff announcements. Regardless of who was asked, everyone had an opinion about it. Within the administration, everyone argued that tariffs were a tool to bring America back to what it once was: a manufacturing superpower. On the other hand, most economists disagreed and argued that tariffs were terrible for consumers.

Related to that, people disagree on whether tariffs are inflationary or whether their effect does not sustainably raise inflation, simply adjusting prices one-off. Therefore, I thought it’s worth discussing the potential outcomes of tariffs, how opponents say they work, and how proponents say they work.

Are they just a 4D chess move by the Trump administration to bring prosperity back to American workers? Or will the plan collapse and increase the hardship for the American lower and middle classes? Let’s find out.

2. Tariffs Are An Old Concept

Tariffs are by no means a new concept. When kings and emperors dominated Europe, tariffs were a common tool to protect domestic industries and support local production for domestic consumption.

During the late Renaissance, tariffs became one of the tools of the dominant economic thought, the so-called “Mercantilists.” The theory of Mercantilism can be summed up as maximizing exports but minimizing imports. Although the policy was spread over all European monarchies, the most well-known mercantilist system was implemented in France under Louis XIV. His finance minister, Jean-Baptiste Colbert, enacted protectionist policies to minimize imports and favor exports.

Yet, it is not a coincidence that the world’s great leap forward and enormous increase in productivity did not come into fruition during that time but only afterwards, when people such as the founding father of modern economics, Adam Smith, challenged the view that the amount of trade was fixed and needed to be regulated to become favorable for one country.

3. Who Benefits From Tariffs?
   
   

Tariffs are taxes, but only on foreign goods and services. Historically, tariffs were a tool to shield domestic producers from competition from foreigners. Introducing a tariff makes a foreign good artificially more expensive. The results are twofold.

On the one hand, producers within the country have an easier time competing with foreign producers regarding domestic consumption. They will sell more units of the goods than if the tariffs hadn’t been introduced. That’s the prominent part.

However, there’s something that isn’t always clear at first. There’s a reason why consumers prefer foreign goods over domestic goods. It’s not necessarily that the price of the foreign-produced good was cheaper—it could also be that the quality was better, but the price was the same. Such a situation makes it clear that domestic producers have less incentive to be innovative and work on quality improvements to gain market share. As a result, tariffs also affect the quality of goods and services domestic producers provide.

Furthermore, it protects domestic industry workers that compete against foreign producers. Therefore, it shouldn’t be surprising that workers' unions and employers support Trump’s tariff announcements.

For too long, he [Stephen Capone, president of Capone Iron Corporation of Rowley, Mass.] said, Canadian competitors have been flooding the New England market with cheap steel products, preventing his and other local companies from winning business. “No matter how low we bid, they can underbid us on any job,” Mr. Capone said. “They’re decimating our market.”

You can go into any historical era where tariffs were introduced and read the same praise from the protected producers. Producers enjoy a higher market share, and their workers enjoy a protected job environment. No matter how much more efficient foreign workers are, or how better the quality they produce, they’re artificially excluded from the marketplace.

4. Who Loses From Tariffs

Yet, all this winning has a downside. Someone must bear the gains of the small group of people enjoying protective measures from the government. And frankly, it’s everybody else: the domestic consumer, who must buy more expensive goods or look for substitutes; the firms and workers in other industries now face a reduction in demand because people must pay more for the tariffed goods.

Regarding the Trump tariffs, the Tax Foundation reported that they will significantly increase costs for US consumers (approximately $1,072 per household), as the tariffs will affect a wide range of products. The estimates vary—they depend on how consumers react and how their response shifts demand—but the undeniable fact is that households will have to decide whether to buy less from the tariffed goods or reduce consumption of other goods and services.

5. The Downside Of Tariffs In A Globalized World

While I have emphasized that many of the protected industries favor tariffs, one must note that this is not true for all of them. For example, Ford CEO Jim Farley emphasized that the proposed tariffs on Mexico and Canada would have a devastating effect on the US auto industry.

Albeit one might ask how a US automotive producer is against tariffs, the answer, plain and simple, is the global trade connection in the current economic landscape. No company is producing goods with inputs that are solely of domestic origin. For example, Ford imports components from these countries to build their cars. Therefore, the tariffs impose an immediate increase in costs for them, and opening up domestic production facilities isn’t instant—it takes years, reshaping the capital structure and creating uncertainty in ways that don’t guarantee long-term gains.

6. Counter Stupidity With One’s Own Stupidity

Given all the evidence of how harmful tariffs are, one might assume that the affected countries will not impose further tariffs on the US as a response. Of course, they didn’t. Almost all immediately threatened the US to impose tariffs of their own. In the case of the European Union, its head, Ursula von der Leyen, even acknowledged that “tariffs are hurtful for consumers” but proceeded anyway and announced the introduction of some “as a countermeasure.”

As of now, it is unclear how the tariff package that Trump will announce on April 2 will look, but at least some countries did do the right thing. For example, Vietnam and Israel have had the proper response from an economic perspective. Instead of making the same mistake as the EU or Canada, they announced that they’ll slash tariff rates for goods coming in from the US.

7. Free Trade, Isn’t It?

Trump, who ran under the slogan “Make America Great Again,” thinks tariffs are a perfect tool to revive America’s manufacturing base. According to Trump and his team, the world has hollowed out America’s production by offering cheap labor and tariffs against US goods while they can export their goods to the US without tariffs.

Yet, even that is a claim that is barely supported by the facts, as economic historian Phil Magness explains:

Contrary to the claims being peddled by the White House, most of our major trading partners have a *lower* tariff rate on average than the United States.

On the other hand, the claim bears a little bit of truth in some economic areas. For example, the European Union has always had high tariffs for US-made goods and even forbids various imports. So, at least, Trump has some point to criticize that. But how exactly should tariffs help to bring production back to the US?

8. The Administration’s Claims That Tariffs Are A Good Thing Are Unsound

According to his chief economic advisor, Stephen Miran, tariffs are a tool to relocate production to the US. They are a cost that the producers bear, not the consumers, which arguably goes very much against all academic knowledge. In an interview with Bloomberg, he said:

A lot of folks have got the effects of tariffs wrong… think about it this way: you’re buying a house, and the city raises property taxes. So maybe you’re going to say,
“I look in the next town.” So, you can adjust your behavior while the seller of the house is inflexible and needs to lower the price and must bear the increasing property tax. Think of tariffs the same way. US consumers are flexible, we have options. We can produce stuff at home, we have a variety of countries where we can import stuff… whereas countries that sell to the US are inflexible.

Honestly, I find this claim pretty surprising because I think Stephen Miran is smart enough to know better. First, there’s no reason to believe that the exporting countries “must” sell their goods to the US. In fact, they can sell them to every other country as well, who offer them a better price (because they don’t have to pay tariffs for buying goods from them).

Second, there’s a reason why the US is not producing the stuff they buy at home. It’s because the US lacks competitiveness with them. It’s not that foreign countries scrambled US industries because they pay cheaper wages, and multinational corporations have moved production there to cut costs. As Connor O’Keeffe explains:

The hollowing out of middle America did not come about because Americans have had the freedom to buy some foreign goods and resources. It came about because of the massive federal apparatus built up over the last century to move as much of our money as possible into the pockets of government officials and their friends at some of the biggest multinational corporations through taxes, inflation, and rigged laws and regulations.

What counts isn’t the wage rate but labor productivity. And—as in all Western countries—labor productivity suffers from regulation and inefficiencies. The proclaimed trade-off, a little bit of higher prices for some goods at the benefit of thriving domestic industries, is simply incorrect.

One can argue that Trump also wants to eliminate regulations and cut taxes, which is good. Yet, one must bear in mind that forcing businesses to relocate production to the US will lead to some problems on its own. In an economy where unemployment is still very low, companies will find it hard to find workers to fill the new jobs. It’s expectable that this will raise wage rates, and the result will either be higher prices or fewer goods produced.

9. Tariffs, Capital Investment & Uncertainty

Furthermore, the implementation of tariffs has another effect that affects the whole production structure in an economy and, therefore, artificially reallocates capital investment. The claim that tariffs encourage domestic capital investment probably works insofar as it makes domestic production more competitive, but it is contradicted by Trump's own erratic behavior, which creates increasing uncertainty.

Take the Trump tariffs against Canada and Mexico, for example. One day he says he will levy them and the next he postpones them, creating uncertainty in the markets. This hardly is an atmosphere that would encourage new capital formation, especially given that new capital investments are years in the making.

As I’ve pointed out before, countries responded to Trump's tariffs by implementing their own tariffs. Hence, the threat of tariffs also hurts American exporters, who now have to deal with these counter-tariffs and might have to write down some of their capital investments.

The Federal Reserve also conducted a study on the effects of the tariffs on Chinese goods during Trump’s first term and concluded that they did not lift domestic production:

The Federal Reserve Board found that the tariffs caused a reduction in manufacturing employment of 1.4 percent. Modest gains (0.3 percent) achieved by shielding domestic producers from foreign competition were “more than offset” by rising production costs for manufacturers who used steel as an input (-1.1 percent) and retaliatory tariffs (-0.7 percent).

Therefore, the tariff plans might offer some political talking points but with little substance.

10. At Best Tariffs Fit Into A Broader 4-D Chess Move

You might recall Trump apologists saying that tariffs are just one instrument in a broader toolkit of reviving America’s greatness. Given the fact that all their claims on tariffs have very little hard evidence behind them, as noted prior, it looks as if this is the last straw they have.

If one looks at all the statements that Trump, Treasury Secretary Bessent, and others have made, one could make up a theory of how they imagine their plans will work. DOGE should reduce government spending, slowing an economy heavily dependent on fiscal expenditures.

That slowdown should incentivize the Federal Reserve to lower interest rates, and the projection of lower growth should also bring down long-term bond yields. Lower long-term yields should encourage capital investment in domestic production, which should be boosted by tariffs and a mix of slashed regulation and lower taxes, which should bring the economy back on track. A 4D chess move, indeed.

Having discussed all the potential problems that tariffs alone can cause, the assumption that this move will work is questionable. If it does, then kudos to Trump. However, that would also mean it will break up a lot of concentrated influence and power in Washington, D.C., something that politicians and lobbyists will not give up lightly.

In summary, the economic implications of tariffs are far from what Trump is promising. Having said that, it’s worth further discussing the implications for financial markets and assets.

11. Are Tariffs Inflationary?

There’s a broad debate about whether tariffs will cause inflation, with various claims. The Federal Reserve thinks that they might increase inflation in the near term, but it is an effect that the central bank should look into because it is transitory. Others, like Mohamed El-Erian, are not that optimistic:

This could be a major rewiring of the domestic economy and of the global economy, a la Thatcher, a la Reagan, where you get a more enabled private sector, streamlined government, a fair trading system. Alternatively, if we get tit-for-tat tariffs, we slip into stagflation, and that stagflation becomes well anchored, and that becomes problematic.

Goldman Sachs thinks that the tariffs could send core inflation back up to 3.5% in 2025 and is forecasting a period of high inflation and low growth, as tariffs likely will slow the economic expansion:

That in turn will come with weak economic growth: Just a 0.2% annualized growth rate in the first quarter and 1% for the full year when measured from the fourth quarter of 2024 to Q4 of 2025, down 0.5 percentage point from the prior forecast.

The logic behind the claim that tariffs are inherently inflationary is that many economists assume that price inflation is heavily influenced by “inflation expectations.” Tariffs increase the prices of goods, and people will expect further price gains in the future, leading to more price increases and, hence, higher inflation.

I’m not so sure that tariffs will cause a spike in inflation. If one accepts the claim that inflation expectations affect how economic actors set prices, then one has to point out that they’ll face a clash with reality when the money supply doesn’t expand.

Without monetary expansion, economic actors face budget constraints. While tariffs could temporarily increase the prices of goods they affect, if people buy the same amount of them, they’ll need to cut back on purchases of other goods and vice versa.

At the current monetary growth rate, however, the effect on inflation should initially remain rather limited. Therefore, I think the theory that inflation will spike rapidly this year is an unlikely scenario.

The reason why inflation might rise after this year isn’t the tariffs, though. It’s the fact that one could assume that the impact of DOGE will remain limited, and an inflicted economic slowdown that the tariffs create will lead to more federal debt and money printing. These two things are inflationary because money printing increases the units of currency chasing goods, and fiscal spending relocates money from financial markets into the economy, doing the same thing. But it does that with a lagging effect.

However, as Daniel Lacalle points out, the narrative has already been created that will excuse the Fed from any wrongdoing in case inflation rises again in 2026:

If inflation continues to rise, the Federal Reserve will use the tariff excuse just as it used the “supply chain disruption” and “re-opening” fallacy in the past. However, the reality remains that an abrupt money surge always creates inflation, and the Fed is not fulfilling its mandate.

12. Implications For Asset Prices

The implications for asset prices depend on which effect is more substantial. If tariffs stifle growth hard and the effect outweighs the monetary impulse, the implication would be that equity markets could see a more prolonged phase of correction. In contrast, bond markets might manage to drift higher (yields lower).

The effect should be the opposite if the monetary impulse is more potent. In my opinion, the growth impact would likely be higher at first, causing the Fed to respond and accelerate monetary expansion, leading to rising equity prices.

In such a scenario, the bond market rally could come to a halt at some point when markets realize that the Fed's actions induced another inflationary wave. Bonds would start to fall again, and yields would rise to new highs to reflect that.

13. A Pretty Big IF

You probably see that there are many potential scenarios for how these things could play out. Hence, tariffs increase economic uncertainty and create financial uncertainty, so the most probable thing to forecast is a rise in overall market volatility.

On the other hand, so far, markets are still expecting that the new tariff policies will suffer a similar fate as the old ones, namely that they won’t stick around for long and are just a “negotiating tool” for Trump to get what he wants from these countries. That means, if they’re implemented and stay around for longer, there is a lot of downside risk for markets that are currently not priced in.

And therefore, it might very well be that Trump’s big economic plan, which many of his proponents see as a “genius move,” backfires so hard that he’ll end up giving up many of his other promises. Say what you want, but Trump is definitely taking a considerable risk here. If it works, he’ll likely be seen as one of the greatest presidents ever. Yet, given what I’ve discussed here, it’s a pretty big if.

Our spirit is never ending
I'll be the protection when you fall
Our spirit is never ending
Tell them it's us against the world

Killswitch Engage - Us Against The World

Have a great month!

Fabian Wintersberger

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All my posts and opinions are purely personal and do not represent the views of any individuals, institutions, or organizations I may be or have been affiliated with, whether professionally or personally. They do not constitute investment advice, and my perspective may change over time in response to evolving facts. IT IS STRONGLY RECOMMENDED TO SEEK INDEPENDENT ADVICE AND CONDUCT YOUR OWN RESEARCH BEFORE MAKING INVESTMENT DECISIONS.