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It’s official: America has finally screwed the pooch?
The real reasons tariffs are so stupid
As everyone knows by now, the U.S.-initiated global tariff war is, as the financial press has called it, “the dumbest trade war in history” -- a socioeconomic unforced error of such magnitude that it recently came close to breaking the bond market and has caused the U.S. stock markets to lose close to $10 trillion in value.
We're witnessing an impulsive, unwinnable barrage of policy blunders of the magnitude of the Smoot Hawley tariffs of 1930 or Russia’s invasion of Ukraine, based on a homegrown, American delusional premise that we live in the 1950s when the United States dominated world trade, or the 1850s when mercantilism success was measured by how much gold was in a country’s vaults.
As everyone also knows by now, the downsides of this drastic trade war include market instability, supply chain shocks, increased inflation, jobs losses, falling income and sales tax revenues, massive losses of geopolitical influence and vital relationships with longstanding trading partners and industries, and higher costs of living for just about everybody and everything that will inevitably lead to increased business and personal bankruptcies if this continues much longer.
If someone wanted to devise a strategy to weaken democratic economies and shift the center of global trade to China and the Asean region, they could not have come up with a better plan.
The truth is the U.S. has had a trade deficit with the rest of the world for 50 years. The last time we had a trade surplus was in 1975. The reason for this is that since then the U.S. economy has successfully transitioned from a manual-labor, manufacturing-based, export-oriented economy (like China is today) to a services, innovation, and intellectual property-exporting and consumption-importing economy that is the envy of the world (or at least it was until recently).
Since the end of World War II, the U.S. dollar and our financial markets have been the gold standard of international trust and the U.S. has been the cultural soft-power leader of the world because the U.S. economy has been the most dynamic wealth engine the world has ever seen in modern times.
What is a trade deficit, anyway?
Contrary to the convoluted nonsense coming out of Washington D.C., having a trade deficit has nothing to do with one’s economic health or prosperity or “fairness” or anything else. It’s just an accounting statistic that is meaningless, taken out of context.
Ironically, the fact that the U.S. can run a huge trade deficit is a sign of economic supremacy, not weakness. But now, we’re being told that this is a bad thing? That we are somehow being “cheated” by economic “giants” like Vietnam, whose products we import more things than we export to them?
Tell me how the 100 million people living in Vietnam, who have an average per capita income of $4,282 per year (in US dollars), can afford to purchase the same value of U.S.-made goods that we purchase from them when the average per capita income of the 340 million people living in the U.S. is $43,289 per year (3.4 times the number of people making 10 times the earnings)?
The Administration has everything inside out, upside down, and backward. We don’t need to fight a trade war. We’ve already won.
Think about it.
A trade deficit means that other countries are willing to trade their blood, sweat, and tears, and hours of hard labor to mine resources and manufacture real “things” in exchange for little pieces of paper – the U.S. dollar -- backed by nothing more than our promise to pay (“fiat” currency). But wait, it gets even better. On top of that, our “evil” trading partners (like Japan, China, and Canada) take the money they earn, satisfying our ability to consume, and turn around and buy our government’s debt to help us keep buying their stuff in exchange for even more little pieces of paper money!
Someone, please tell me, what is a better “deal” than that?
If I run a lemonade stand and buy lemons from the grocery store, but the grocery store doesn’t buy anything from me, I have a “trade deficit” with the grocery store. Does that have anything to do with the success of my lemonade stand or my wealth? Is the grocer being “unfair?” Am I being “cheated” or “ripped off?”
And if the U.S. government imposes a “tariff” on Mexican lemons (which is where my grocer gets them from), should I blame and punish my grocer for charging more for lemons? Or, if I take out a bank loan at 10% interest to purchase the lemons (and have a “trade deficit” with my bank) but make 100% profit on that borrowed money because of all the lemonade I sell, is that a “bad deal?”
(CLICK HERE for a more erudite explanation by Professor Jeffrey Sachs.)
Trade deficits and debt are not the same thing
The Administration in D.C. is also peddling massive misunderstandings by conflating trade deficits with debt. They are separate phenomena. In fact, trade deficits typically reduce the prices of staple items, which reduces people’s need to over-extend themselves and take on more debt.
Trade deficits do not create debt or reduce debt. First, because it depends on whether or not the price of the imported goods results in greater U.S. business profits or consumer benefits, and second because we have the option to pay for imported goods in cash or on credit (debt). Whether we can do that or not, as an individual or a nation, is a whole other story. However, there is “good debt” and “bad debt.”
“Good debt” is if you can make more on the money you borrow than the cost of borrowing that money (the interest rate you have to pay on the debt) because the borrowing results in an overall net increase in your wealth.
So, when you take out a loan to build a new factory, you are doing it, and the lender is lending you the money, because you both believe that the factory will result in greater profits will repay the debt plus the interest and make you more profit, to boot.
On the other hand, if you run up credit card debt that charges 23% in annual interest on your unpaid balance, while the cash in your money market (that you could have used instead of going into debt) is only making you 4.5%, that’s called “bad debt.” Or if, as a nation, we borrow more than our GDP growth can support, that’s also bad debt.
However, the fact that America and Americans have too much bad debt has nothing to do with our respective “trade deficits.” It has to do with living beyond our means, not saving enough, mismanaging our finances, failing to prioritize our needs, and spending money on stupid, wasting assets like fashion, status symbols, new cars every year, and generally being dumb enough to let the advertising industry convince us we’re a loser without more “stuff” than we need.
As a nation, that would include spending hundreds of billions on military hardware, weapons, and ships that are never used, and generally failing to invest for the long-term in things like education, jobs training, healthcare, medical breakthroughs, scientific research, physical infrastructure, and a long list of other things that build the productivity of our nation.
If we spend more than we make, if we borrow more than we can afford to pay back, if we don’t invest wisely, then we have debt problems, regardless of whether the things we’re spending our money on are made in the U.S. or a foreign country, or whether that results in a trade deficit or not.
And worst of all, if all of the countries now threatened with draconian “reciprocal tariffs” were to stop buying our national debt (U.S. Treasury bonds), we’d be out of business in a heartbeat – a hint of which started to happen last week in the international bond markets when U.S. Treasury buying hit an “air pocket” (loss of faith in the U.S. dollar and our trustworthiness) of a type that was last seen only in 2008 and in the 1930s).
Tariffs and trade wars are really stupid
“Tariffs are an act of war.” ~ Warren Buffet
According to a study by the Wharton School of Business, recently announced U.S. tariffs are projected to reduce the GDP by 8% and wages by 7%, while inflation in the price of all things will increase. As a result, all households are expected to be worse off, with a typical middle-income household facing a $58,000 lifetime loss in wealth.(1) And while it’s true that tariffs raise government revenues, in the short term, this comes at a much higher cost of broader economic harm.(2)
Specific, targeted tariffs can sometimes protect an American producer disadvantaged by a foreign government’s subsidy of a competing product. But that protection can only succeed as a temporary measure. Long-term coddling of U.S. companies from so-called “unfair competition” (a somewhat nonsensical term in a capitalist system) can result in weakening American producers, who no longer have sufficient incentive to take on risk or improve their operations by making new investments in efficiency and productivity.
And tariffs, at best, can only protect existing industries from lower-priced competitors. But the fundamental fact that other countries have cheaper labor, land costs, and operating costs (due to paying slave wages and no health care requirements or environmental protection laws) cannot be solved by tariffs.
Even in situations where creating a home-grown competitive operation is even feasible, starting up a major manufacturing enterprise costs billions of dollars and can take a decade to become fully established in the global market, particularly in increasingly complex industries such as computers, semiconductors, aerospace, etc.
Imposing tariffs without productivity investment is doubly stupid
If I own a company that’s not running efficiently and its high operating costs are hurting profitability, what are my options? The most obvious thing is to cut costs, but cutting costs alone will not get me very far and will likely reduce my productivity. Increasing efficiency and subsequently profits, without reductions in quality and performance, requires investment, not just cost cutting.
At my lemonade stand, my operation consists of me and my helper. My helper is really skilled at serving customers but doesn’t know accounting or how to make lemonade. The problem is that our sales growth seems to have plateaued. So, according to the economic “theories” of the current Administration in D.C., I should simply fire my helper to cut costs. Problem solved.
In reality, the net result of this will be a decrease in the number of customers I can serve and a commensurate decrease in revenues because I’ve eliminated the increased productivity my helper provided.
What I really needed to do was invest in my business, like training my helper on how to make lemonade to relieve me of having to do it and purchasing new software so my sales tally and accounting are done more efficiently. That would free me up to focus on marketing or maybe even look for a place to open a second location. I should also probably make a capital investment by planting a lemon tree in my yard and spending time looking for another lemon provider instead of arguing with my grocer.
The point is that randomly reducing costs is not a solution to anything and imposing tariffs (taxes) without capital investments to facilitate trade or concurrent government tax incentives or outright subsidies to help offset negative impacts on importers and businesses is a classic case of “the beatings will continue until morale improves.”
It just doesn’t work that way.
Imposing tariffs, particularly on labor-intensive products that the U.S. cannot produce inexpensively (electronics, clothing, toys, etc.) or things we can’t grow in our climate (coffee) or needing vital resources that we have no access to (e.g., rare earth minerals) is not “bargaining for a deal.” It’s economic suicide.
Likewise, imposing tariffs in the hopes of stimulating new, homegrown manufacturing jobs, without concurrent investment in workforce education, jobs training, or affordable healthcare, is pure folly.
Worse still, placing tariffs on domestic importers (increasing their costs) first, without a long-term plan to incentivize new investments in competitive industries, deprives U.S. companies of the capital they need to invest in those new industries.
But even that’s not the biggest reason tariffs are stupid.
The most efficient users of capital win. Period.
Everyone in the world wants the same thing: the best quality product they can buy for the lowest possible price. That can only result from increasing international, rules-based trade, maximizing productivity, and facilitating capital flows to the most efficient and productive users of that capital.
U.S. private enterprise, particularly small businesses and startups (who create the majority of new jobs), are some of the best in the world at maximizing the efficient use of investment capital to increase productivity and profits. Economically speaking, this is the secret sauce of America’s “financial exceptionalism.”
As such, imposing tariffs (taxes) on the internationally sourced labor, products, and materials that these entrepreneurial businesses need to operate, thrive, and provide consumers with the widest variety of choices at the best possible price is arguably the worst kind of wealth redistribution imaginable.
Tariffs take money (potential investment capital) out of the hands of the most productive and efficient users of that money (private enterprise and consumers) and put it in the hands of, unarguably, the least productive and least efficient user of that money… our federal government.
Writ large, this is a recipe for economic demise.
Are their bad actors in the world. Yes, of course. But the counter to those are unified sanctions by rules-based, cooperative, global trading partnerships, not isolationism and across-the-board protectionist tariffs against any and all forms or global trade.
No matter how you rationalize it, this will not end well
Every day on TV we see Wall Street scions and “financial experts” feverishly scanning historical data in a vain attempt to predict the market’s volatile action based on random daily events for which there are no precedents. They seem convinced they can “crack the code” and make sense of what is essentially nonsensical. They are like children in a dysfunctional family whose entire existence revolves around hoping against all evidence to the contrary that daddy will come home in a good mood tonight and won’t beat up mommy again.
“Father Knows Best” was just a 1950s TV show.
Meanwhile, the world’s billionaires and the most powerful industry leaders and law firms seem to believe that there is a viable future in getting down on their knees and sucking up just a little bit harder to a barrage of nonstop threats, bullying, and utter nonsense spewing from the White House.
Well, I’ll go out on a limb here and advise all these “big machers” that hoping there is some magical “plan” afoot that has yet to reveal itself, which justifies the current anti-science, anti-education, anti-healthcare, anti-medical research, anti-free trade, anti-immigrant, anti-due process, anti-rule of law, and anti-truth attack on rational thought and civil society, a “plan” that will save us all, is a fool’s errand.
If this keeps up much longer, things are going to end badly for everyone. And although it would take a lot to unseat the dollar as the world's reserve currency, any weakness in confidence can have outsized impacts. The panicky selling in the Treasury market last week was a warning shot across the bow.
It’s time to declare victory and leave the field.
(1) https://budgetmodel.wharton.upenn.edu/issues/2025/4/10/economic-effects-of-president-trumps-tariffs
(2) https://budgetlab.yale.edu/research/fiscal-and-economic-effects-revised-april-9-tariffs
Bob Silvestri is a long-time Mill Valley resident, the Editor of the Marin Post, and the founder and president of Community Venture Partners, a 501(c)(3) nonprofit community organization dedicated to bringing the community's voice to government decision-making and funded exclusively by individuals and nonprofit donors. Please consider donating now to support our work.