The Good, the Bad, and the Ugly

Before getting into the tariff issue, I’d like to thank Speaker Jon Burns in Georgia for his leadership last night. The Religious Freedom Restoration Act passed the Georgia legislature and will be signed into law by Governor Brian Kemp. The corporate lobbyists tried to kill it, but they were not successful. Senator Ed Setzler and others deserve a lot of praise for this.

Now, on to the contentious matter.

Let’s hope that President Trump’s opening salvo will be just a negotiation tactic. Imposing a baseline, non-reciprocal tariff does not appear to be a negotiation tactic, but we can hope. Of course, in hoping, we need to wonder if the wipe out of several trillion dollars in 401(k) values in the last 24 hours makes those negotiations worth it.

Created with TradingView

Let’s start with what a trade deficit is. It is not actually a bad thing, and more often than not, countries running trade deficits are those that are wealthier and healthier economically. Growing up, when I heard “trade deficit,” I thought it was bad because deficits are bad. That’s not what is going on here.

A trade deficit means that our country imports more from a country than we export to that country. Our goods tend to be more expensive because labor and production costs in the United States are higher. A country like Vietnam is poor. Its labor and production costs are lower than ours, so goods can be manufactured in Vietnam at a cheaper price than they can be here. That means the Vietnamese do not have the purchasing power to buy as many American goods as Americans can buy from Vietnam. As a result, we run a trade deficit with Vietnam. The Vietnamese poor (or even their Middle Class) cannot buy our expensive stuff, and our poor people, far more affluent than the Vietnamese as a whole, can buy a lot of their cheap stuff.

The result is that even the poorest Americans can buy a lot of clothing, food, and products for their home, while the Vietnamese cannot.

That’s all a trade deficit is. Unsurprisingly, poor nations tend to run trade surpluses, and wealthy nations run trade deficits.

The problem is that President Donald Trump, since he was a businessman, has always gotten the concept backwards and is now rolling out a trade policy that has the potential to reset the balance of global trade in China’s favor, alienate the United States from global supply chains, sever the United States dollar from global reserve currency preferences, and impose, by fiat, the largest tax increase on the American public since 1968.

Yes, friends, what happened in the Rose Garden yesterday amounts to the most significant tax increase on the American public since the Revenue and Expenditure Control Act of 1968, which, unlike the tariffs, actually passed Congress.

It is frankly galling to see the GOP, the party supposedly of limited government, cheering on tax increases by executive fiat, particularly knowing the very people cheering would be freaking the f— out if Joe Biden did the same thing.

When Barack Obama and congressional Democrats realigned the American healthcare system, Republicans were furious and voters revolted at the ballot box. Donald Trump, single-handedly, just upended American global trade and the economy, and many of his supporters are cheering. Most of them do not understand the economic ramifications of these actions.

We are told an American business can now and should build a manufacturing base in the United States. However, these businesses do not know how long the tariffs will last, and, in the worst-case scenario, they could end in four years with a new president. So do you think they want to invest the capital in new factories with higher labor costs that won’t be finalized for more than four years in the United States when the tariffs could go away within four years?

It is not a wise investment for many businesses. Think about oil companies, which are hesitant to invest in new oil production even with Trump in office because it can take up to twenty years to get a solid return on investment, and Democrats could be back in power between now and then. Why would a shoe manufacturer want to make more expensive shoes in the United States when the factory setup and training will take five years, and the tariffs could be gone in four?

Never underestimate the predilections of the winning political party fixing the problems of the losing political party. Trump’s tariffs have given the Democrats an economic message that silences their cultural activists and elevates their economic pragmatists.

If you want to encapsulate Donald Trump’s economic vision, a 10% baseline tariff puts the United States in the territory of an African third-world nation. Every single developed nation on planet earth has a baseline tariff of less than 10%, and most of those nations, contrary to what you might believe, exempt the United States from paying tariffs due to trade agreements Trump just scuttled.

The good thing is that Trump’s tariffs don’t take effect for another week, so countries have time to negotiate changes.

Likewise, the total Chinese tariff will increase by over 50%, which will bring economic ruin to China. That’s a good thing.

Rare earth minerals, pharmaceuticals, precious metals, and high-tech components will be exempt from tariffs. Much of what is already covered under the USMCA deal with Mexico and Canada will also be protected from tariffs.

The bad news is the 10% baseline tariffs. This is not a reciprocal tariff. It is a baseline tariff that will apply to all otherwise non-exempt goods. This will have an immediate inflationary effect and slow the economy. It comes with a 25% tariff on imported vehicles and vehicle parts. Those, too, are not reciprocal. Steel and aluminum tariffs are also imposed and are not reciprocal.

Additionally, these tariffs are clearly rushed. The President is imposing a tariff on Heard and McDonald Islands, which penguins, not people, inhabit. Those islands were on the list with a 10% tariff imposed, but they literally have a population of zero human beings.

Israel not only has a free trade agreement with the United States, which means virtually every American good has no tariff, but it also scrapped the few remaining tariffs with the United States. Nonetheless, it will be hit with a 17% tariff, and some Trump officials, on background this afternoon, slandered the Israelis as intellectual property thieves to justify the tariffs.

The Trump team claims the European Union nations have massive tariffs on the United States, but the numbers are imaginary. What the Trump team did to claim the EU has massive tariffs is a simple math formula.

The Trump team took a genuinely insane metric to display as a nation’s tariff against us. Essentially, they took a country's trade deficit with us as a numerator in an equation with the denominator being that nation’s exports to the United States, then multiplied by 100.

For example, we have a trade deficit of $123.5 billion with Vietnam, and exports from Vietnam are $136.6 billion a year. So:

\((123.5/136.6)*100=90.41\)

Behold — in the White House chart, they claim Vietnam imposes a 90% tariff on the United States. This is economic illiteracy and insanity concurrently.

Another example is South Korea, which has a free trade agreement with the United States. Undeterred, the President is adding tariffs to South Korean imports and misrepresenting how South Korea treats American imports. He claims South Korea assesses a 50% tariff on American imports. It is 0.79%, with most American goods even exempted from that.

Then there is Australia. We run a trade surplus with Australia because Australia does not have a massive manufacturing base but is very wealthy, so it can afford American imports. Nonetheless, Trump is imposing a 10% tariff on Australian imports, claiming Australia, which has a free trade agreement with us, imposes a tariff on us. That is not true.

Likewise, Switzerland will be hit with a tariff higher than most European nations, but 99% of American goods sold in Switzerland have no tariff imposed.

The ugly is Donald Trump's addition of massive tariffs to Asian countries outside China. Many American manufacturers moved their businesses to places like Vietnam, which are actually not pro-China. Now, Trump is smacking these countries, Taiwan included, with steep, steep tariffs. In addition to hurting those economies, he risks driving many of them towards China. He risks hurting American businesses and consumers who could not afford to buy the same products if manufacturing were repatriated. He is directly hurting American manufacturers who moved their manufacturing out of China to Vietnam, Laos, etc. He is also hurting American consumers who shop at Walmart, one of the largest importers in the country.

There are ways to use tariffs to build alliances and undermine China strategically. Trump has gone about it precisely the opposite way.

Worse, this will most likely lead to a recession. A recession will lead to a resurgent Democratic Party, fixed solely by the excesses of the GOP. The wokes have not learned their lessons, but they are smart enough to shut up and make it about the economy in the midterm elections. Voters are going to be pissed off if tariffs persist and the economy slows down.

There were strategic ways to deploy tariffs. Misinformation, inaccuracies, and implementing these tariffs risk the MAGA project. You may think they are acceptable and necessary. But will your neighbor? The odds are they will not.

One of the main reasons your neighbors will not like the tariffs is that the President forgot to exempt grocery imports. Your bananas, coffee, and even beer are about to increase in price. Small craft brewers will be hurt because many of them source Canadian hops, which will be tariffed, and imported aluminum cans.

When I mentioned coffee on social media last night, people criticized $7 latte drinkers. But we do not have a high-volume domestic coffee bean industry. Folgers and Maxwell House buy their beans in countries that will now be hit with tariffs that do not exempt coffee. The coffee of the working class is going to go up, and so are the bananas the stay-at-home mom is feeding her toddler.

The bottom line is that this massive tax increase will negatively impact the working class the hardest. Roughly 50% of the vehicles sold in this country under $40,000.00 are imports, and that, too, will hit the working class.

Think of the “I did that” stickers people put on gas pumps after Joe Biden caused high gas prices. The Trump version will soon appear at local grocery stores and elsewhere.

For perspective, the United States is about to have the highest baseline tariff on imports of any developed nation. Literally every other first-world nation will have a rate lower than ours. The second highest rate is South Korea’s at 8.6%, but over 90% of imports to South Korea from the United States have a 0% tariff, and the other 10% have a 0.79% tariff thanks to a free trade agreement that Trump’s tariffs just killed.

This is the Trump Administration signaling that they want to leave the world order instead of leading it. Liberation Day will liberate you from your money and the United States from global leadership.

You may think the cost of global leadership is too high. Wait till you see the cost of not leading it.

But don’t worry; tariffs are good and popular. Suppose the GOP faces massive defeats next year. In that case, it will be a globalist/corporate/progressive conspiracy to stop the tariffs by stealing the election, not a rejection by the voters who love the beautiful tariffs.

The people love the tariffs. Trump said so.