Trump's Tariff Rationales Are As Incoherent As They Are Self-Contradictory

"They left as soon as they came." That is somewhat an accurate depiction of Trump's latest barrage of tariffs. On April 2, what Trump called "Liberation Day," he implemented a two-tier tariff system. In addition to there being a baseline 10 percent tariff on imports, he also imposed so-called "reciprocal" tariffs on 90 countries based on what he purported were other countries' tariff rates. As I pointed out in my critique of Trump's "Liberation Day" tariffs last week, his tariff rates were not calculated based off of other countries' tariff rates (he lied about that part), but rather other countries' trade imbalances. Rather than being taken as liberating news, the stock market ended up crashing to the point of causing the biggest two-day wipeout in U.S. history. 

Last Wednesday (April 9), Trump announced a 90-day pause on that second tier of tariffs (i.e., the ones above 10 percent), with the notable exception of China. The baseline 10 percent tariffs on imports remain intact. The Dow Jones, NASDAQ, and S&P have somewhat recovered from the fall. However, JP Morgan and investment firm Blackrock are still anticipating a recession this year, as are a majority of respondents from the quarterly Chief Financial Officer (CFO) Council Survey. 

I had a piece about how these tariffs could unsurprisingly cause a recession all ready to go, but I had to hold off because of this latest development....at least for now. I might end up publishing it here at a later date if Trump reinstates the second, higher tier of tariffs. In the meantime, I want to point out how incoherent this whole strategy has been. He threatens these high rates and then he rescinds them, at least temporarily, the moment the stock market decides to tank. It is not simply the haphazard, unpredictable modus operandi that bothers me, but also the rationales that Trump uses to justify the tariffs. From what one can gather, the Trump administration has laid out three main rationales for these tariffs.

1. A negotiating tool. On April 4, Trump said that the new trade barriers give the U.S. great power to negotiate better trade terms. This gets to the theme that Trump is trying to rectify what he sees as "injustices of global trade" that the U.S. has had to endure.
2. Increase government revenue. This is the argument particularly used by Trump's lead trade advisor, Peter Navarro. Even Trump himself has floated the idea repeatedly of repealing the income tax and replace it with tariffs. The Tax Foundation explains how that plan would not work, but I digress.
3. Bring manufacturing back to the United States. In a White House fact sheet, the Trump administration claimed that trade deficits are hollowing out the U.S. manufacturing base. He plans on using tariffs to revitalize U.S. manufacturing. 

Forget for a moment that the Trump administration's messaging about whether the tariffs are short-term negotiating tool or a long-term source of government revenue is inconsistent. I take issue with all three of these rationales by themselves. Trade deficits are not bad for the United States. The manufacturing sector is not going to have a revival akin to what it was like in the 1950s, in no small part to technological progress. U.S. tariffs are ultimately a tax on U.S. consumers and producers because that is where most of the tax incidence occurs. That is how it worked with the Trump tariffs from his first term. And as I have explained numerous times, collecting tariffs come with considerable economic harm to the American workers and small businesses that Trump claims to help. 

What makes the Trump administration's rationales for tariffs is that when put together, they make zero sense. They create an impossible trinity because if one of these rationales is true, then the other two cannot be true. How so?

Take the "tariffs as a negotiating tool" argument. If tariffs are merely a negotiating tool to make other countries comply with Trump's demands, then the tariffs are not collecting revenue because they are not ultimately implemented. That also means the tariffs cannot afford domestic manufacturing the protection it would need to rebuild. 

What about the "government revenue" argument? If the government is collecting this tax revenue, it means that the tariffs were more than a negotiating tactic. It also means that if the tariffs are successful in collecting tax revenue, it also means that foreign goods are still crossing the border. So naturally, they are not creating jobs at home because the trade flows have not significantly changed.  

If the tariffs are being used to bring manufacturing back, then they are more than a mere negotiating tool because the taxes have been implemented. However, if manufacturing has indeed come back to the United States because of the tariffs, that means production is taking place in the United States and the United States is exporting. The idea with this rationale is to create a cheaper domestic product, which ideally for Trump would mean avoiding imports. Since the tariffs here are import taxes, the government is not going to be collecting all this wonderful revenue to make government coffers great again. 

As I have pointed out since 2016, Trump's love affair with tariffs is a torrid one rife with torment and anguish. The Trump administration's communication with tariffs has been incoherent, showing that impulse is dominating the decisions, not clearly thought out, serious policy decisions. Sometimes tariffs are presented as a short-term negotiation tool used to bludgeon other countries into submitting to Trump's will. On the other hand, Trump says things like "my policies never change." His Commerce Secretary also said that the tariffs will stay in place, which was only three days before Trump announced the pause. So which is it: short-term negotiating tool or long-term government policy? 

An important lesson I remember from my days as a market researcher is that the one of the only things that business owners generally have a bigger issue with than red tape is market uncertainty. Why? Uncertainty is not conducive for businesses to make investment decisions. Businesses make plans months or years in advance in the hopes that investments pay off in terms of increasing profit and equity. Consumers also feel better when purchasing goods or services from businesses and knowing that those businesses have a high likelihood of staying in business. It is hard to maintain that confidence when Trump is being impulsive and making major trade policy decisions "from the heart."

Although the Trump administration is uncertain with how it wants to try to dupe the American people in falsely believing that tariffs are the greatest thing since sliced bread made solely in the US of A, what is certain is that this inordinate amount of trade uncertainty with Trump's tariff nonsense is going to put the American economy in a tumult and the stock market going up and down like a yo-yo until there is clarity. 

Unless Congress can end the president's deceptive "emergency" declarations and retake the tariff power that the Constitution grants it, odds are we will be back here in three months with Trump reinstating the tariffs because he is the one holding all the cards. In the meantime, it will be the American people and businesses who will suffer from this tariff nonsense.