The Ephemeric

There seems to be a widespread misunderstanding amongst the public as to what exactly a tariff does and what purpose it serves. So let's start with the basics. A tariff is a fee the Government (could be a national Government, a supranational Government, or customs union) charges to buy and sell goods outside the domestic market. It is essentially a form of tax on cross-border transactions, most commonly imports.

What is the purpose of a tariff? Generally it's to protect local industry. Businesses may seek to import goods and services from elsewhere if it is cheaper, but in doing so they may weaken the domestic providers of those goods and services. By charging a tariff, you are effectively making the import more expensive, and thus less advantageous, in the hopes that without this benefit the business may choose to do business domestically instead.

In general tariffs have become less ubiquitous in our modern globalised economy. The prevailing liberal mindset in recent decades has settled on allowing the free-market to do its thing with as few limitations as it is responsible to allow. That being said, tariffs are still commonly used for strategic purposes to protect vital domestic industries, for example in the military and national security sectors, agriculture, and to protect infant industries and promote national development of key technologies.

What is notable and remarkable about the Trump tariffs is the scale and scope. He is proposing widespread tariffs on broad sectors and at punitively high rates. These are tariffs used to a degree rarely seen in the developed world during the postwar era, and their impact could be devastating to the global economy.

So why is the administration doing this? It's a difficult question to approach simply because there is so much spin, so much misinformation. Both sides are resorting to highly simplified arguments that play well on TV, but that don't really capture the reality of what is going on or why. So let's tackle this in stages. We'll start with the surface-level arguments for and against, the types of discussions you will probably have seen bounced around on cable news over the past several months. Then we can look at some of the deeper arguments, and finally come to the hard truth about the end game of this policy, and what the ultimate result is likely to be.

Depending on who you speak to, these tariffs are either economically illiterate drivel that will crash the global economy, or a necessary action to level the playing field and bring jobs back to America. The truth is more nuanced than you might think. 

Suffice it to say, tariffs, and indeed economics as a whole, is a topic with which the general public is only fleetingly well versed. I say that with absolutely no disrespect, economics is a dense and complex subject. Most people are reliant on the explanations they hear from the media and from the Government, and in general these have been of pretty poor quality.

The most common explanation you will hear from the administration is that these tariffs are about other countries paying their fair share, an implication that these tariffs are fees that other countries will need to pay, and that America as a whole will reap the profits from these payments. That, of course, is pretty much nonsense. Tariffs are a tax on the American people. We pay those fees, not the other country. If an American company wants to buy a product from China for $10, and the Trump administration wants to add a 10% tariff on that import, then that product now costs $11. China still gets its $10, the American business pays the extra dollar.

This is sadly pretty typical of what we have seen from Trump's two administrations. Quick, snappy sound bites with little regard as to whether they reflect reality in any way. All positive marketing spin, without any acknowledgement of the downsides.

But I would argue that the opposition's counter-arguments are also wide of the mark. They quite rightly point out that the above explanation is nonsense, but they typically leave it at that. For the sake of simplicity they fire back that a tariff is a tax on the American people, and thus inherently bad in all its forms. There is some truth to this, but it's not the whole truth. As mentioned above, tariffs are and have been used even before Trump came along. They do serve some purpose. But as we've seen, there's little place for nuance in politics these days. Which is why we will now get into some of the deeper arguments.

So what are the real arguments for and against tariffs, free from the political spin?

We've already touched on some of this in the preamble to this article, but nowadays tariffs may be used to protect vital industries and ensure that some level of domestic activity exists for strategic or security purposes, even where it is not the most economically efficient.

Tariffs had previously been used more widely prior to the globalisation boom of the late 20th Century, and there is a school of thought that we should move back in that direction. The logic goes that globalisation effectively incentivises the outsourcing of certain types of manual labour, specifically manufacturing and other forms of work that require less formal education, and so can easily be performed in less wealthy nations at lower cost. But we still have those lower-education strata manual labourers in this country, and if we're outsourcing their jobs then they will struggle. 

This is the central dilemma and crux of the anti-globalism ideology. Getting too much into the possible solutions for this problem is beyond the scope of this article, but in the context of tariffs, the argument would be that by making it more expensive to hire labour outside the country, you disincentivise this behaviour and businesses will hire locally instead.

While this is true, it comes with a lot of problems. Proponents of this idea are essentially calling for a return to the more-protectionist economic policy of yesteryear, a nostalgia-tinged time where the nation was prosperous and the lower and middle classes could make enough money to get by. The trouble is, these depictions of the past leave out a lot of crucial context. For starters, poverty was actually much higher back then, and the nation's economy as a whole was a lot smaller. One could argue that the wealth may have been more equitably distributed to all people back then, but the reality is that it's just certain very specific sectors being squeezed right now. The country as a whole is more wealthy now than it has been at any other point in time. That prosperity may not be felt by certain segments of the population, but most classes of people will feel that benefit. Unfortunately, that greater prosperity is directly linked to the very thing these people are trying to reverse, the lower cost of doing business afforded by globalism. 

The example often brought up in the media is Apple. An American company that does most of its manufacturing overseas in places like China where labour is cheaper. Apple is a big, wealthy company, so theoretically they could shrug off the squeeze of tariffs and build their next factory in the US. The problem is that most companies are not Apple. The reason the economy is so much bigger now than it ever has been is because the barrier of entry for people to do business is so low. Most businesses are small or medium sized enterprises, and they may not be able to absorb the same economic shock that a company like Apple can handle.

So while, yes, you could theoretically make it more expensive to do business abroad and disincentivise sending jobs overseas, doing so is going to squeeze these small businesses and ultimately shrink the economy. The result is that more people are likely to end up less well off than they are now. It also won't do much to address the underlying issues causing the economic distress. From a coal-miner's perspective, the matter might seem as simple as giving him a job, but there's a reason why that doesn't work economically any more without intervention. The world has changed, the solution is that wealthier nations need to get better at training a workforce for a modern economy. The current status quo, letting those left behind workers suffer quietly, is unsustainable, but so too is trying to grant them a temporary reprieve by financially doping their industrial sector. The genie won't go back in the bottle.

Logically, your next thought might be 'Well why is the Trump administration doing this then? Why aren't they reaching the same conclusions as you?' The answer is that, actually, they probably are. There's nothing controversial or unorthodox about what I have written above. Whatever you may think of the Trump administration, his economic advisors are not idiots. They know full well that implementing this extreme protectionist policy will likely provide, at best, only a temporary boost to certain demographics, the benefit of which would probably be offset by the damage done to everyone else. So then why press on with it? It's time to look at the hard truth of the Trump tariffs, and shed some light on a core aspect of Trump's leadership style.

Here's the truth about the Trump tariffs: he knows that this kind of extreme protectionist policy isn't going to benefit anyone, least of all Americans, in the long run. He's talking a big game drawing on the nostalgia of an idealised bygone time, and demonising the easy targets as an ill to be cured by drastic action, but in reality it's all for show.

What Trump is doing here is fairly transparent for anyone that has followed his administrations closely and become accustomed to how he gets things done. This whole song and dance is little more than brinkmanship with the rest of the world. Trump is betting that the American economy is so massive, so significant, so crucial to the global economy and the specific economies of other trading partners, that whatever damage these tariffs inflict upon America will be inflicted on those other countries even more so. He's betting that the risk of losing American trade will prove to be such an existential threat to the leaders of other countries, that those leaders will simply offer concessions and more favourable trade terms in order to avoid their implementation. He's probably right.

Honestly, I don't think this style of foreign policy is necessary. I don't think it does much to address the most significant economic issues facing America, and certainly does little to help those struggling economic classes to which his protectionist arguments are addressed, but he's also not wrong. America is just that powerful economically, and he probably can extract economic benefits from other countries through this strategy, extreme though it may be.

This really gets at the core of Trump and how he works. We've seen this playbook before. Noise and chaos, convince the other side that you are irrational and dangerous, force them to the negotiating table just to avoid the risk. It's over the top, but it can work. The problem with this is twofold.

First, and most significant, this administration just hasn't shown itself to be all that competent at negotiation. This week's deadline had been intended as a line in the sand. The expectation was that around 100 new trade deals would be signed by this date, and thus the tariffs could be averted. As of the time of writing, Trump has only managed to reach 3 new trade deals. For whatever else you may think of Trump and his policies, he just hasn't ever been that effective a President. A lot of bluster with little to show for it. This kind of tactic requires a deftness and cunning that Trump's administrations simply haven't demonstrated. With each passing deadline Trump's threat is taken a little less seriously, and his leverage decreases. He can only hope that the gulf in negotiation position is such that he can still scare his opposite number into submission despite these setbacks.

The second issue is, frankly, corruption. Another core attribute of Trump's administrations has been the extent to which he uses his position to benefit himself or his allies both economically and politically. We saw it in his first term when he attempted to bribe Ukraine into helping him win re-election by threatening to withhold military aid, an act for which he was ultimately impeached. We're already seeing it again with these tariffs, with the news this week that Trump was threatening to impose tariffs on Brazil in retaliation for the rightful criminal prosecution of former Brazilian leader, and Trump ally, Jair Bolsonaro. This has always been an issue with Trump, even to the extent that he may be able to get a win from something, it's not always his intention to use this to benefit the country or American people. Sometimes it is purely for self-interested reasons, and unfortunately that may well be the case here.

I think that about sums up the topic. I hope this has been a useful primer as to the subject of tariffs, the arguments for and against, why they aren't as stupid as Trump's opponents would have you believe, but also why there's genuine doubt as to whether we'll actually see any kind of benefit. We'll see how it turns out, but for what it's worth my own view is that I've had enough of this shtick.