Trump's Trade Moment

It is no secret that a signature component of President Donald Trump’s economic agenda is the use of import tariffs. From the moment he entered office on January 20, 2025, President Trump has moved quickly and frequently to assess tariffs on virtually all imports. He placed a 25% tariff on non-covered goods from Mexico and Canada (goods not covered by the USMCA) and a 10% tariff on China for its role in the trafficking of fentanyl. In April 2025, he launched “Liberation Day”, wherein he applied nation-specific tariffs using an interpretation of the International Emergency Economic Powers Act (IEEPA). From this benchmark, he has since brokered agreements with the United Kingdom, the European Union, India, Japan, South Korea, Vietnam, Thailand, Indonesia, and more to establish more concrete tariff rates. He used Section 232 of the Trade Expansion Act to place tariffs on aluminum, steel, and semiconductors, and Section 301 of the Unfair Trade Practices Act to hit China for its unlawful practices.

This tariff policy has been fast, furious, and ever-evolving, leaving investors, consumers, and trading partners in a whirlwind of uncertainty. This culminated in the six-to-three ruling by the Supreme Court in February that invalidated President Trump’s interpretation of the IEEPA, effectively suspending 95% of his tariff policy in an instant. President Trump responded by levying a 15% import surtax on all imports across the board, using Section 122 of the Trade Act of 1974, though these can only be assessed for 150 days before Congressional approval is needed. There is tremendous uncertainty about what tariffs will apply to each country and each good from week to week. The process by which President Trump has enacted his chief policy has indeed undermined its effectiveness, both politically and economically. President Trump has a unique opportunity to shift the narrative and salvage his economic legacy. If I were the president, this is precisely what I would do to reset the conversation.

First, the President needs to articulate the case for tariffs. He is not wrong in his policy preference, but that is irrelevant if he cannot articulate the “why” to the American public. The public has been conditioned for thirty years (really even longer) that unfettered free trade is a net good for society, that questioning this dogma is tantamount to foolishness. Just because we have institutionalized dogma, does not make that dogma correct. The first step in outlining the case for tariffs is to outline the underlying problem, and why he determined it to be an emergency in the first place.

The United States has run a consistent, and enlarging, trade deficit since 1975. President Trump is correct to identify that as a problem. There are voices in the online podcast world that seek to dismiss this as nonsense. They will argue that trade deficits are irrelevant and will use analogies like a consumer shopping at a grocery store to demonstrate why the concept is ridiculous. They will argue that you run a trade deficit with your local grocery store every time that you purchase a shopping cart’s worth of goods and services. You aren’t upset because what makes you wealthy are the material things with which you walk away from the transaction. This was the classical argument against mercantilism. Why obsess with how much gold you have in your vaults, when gold itself doesn’t satisfy any want, but rather the goods and services which gold rbcan purchase.

The problem with this line of thought is that they are right but missing the broader point. You do run a trade deficit with your local grocery store and every other retailer with which you interact. That’s not what we’re focusing on with this discussion. Similarly, you run a trade surplus with your employer. You sell your labor, and they pay you money of equal value. What matters is the aggregate (sum) trade deficit. Do you sell more value to the broader market than what you buy? Meaning, is the value of your income greater than the value of your total consumption? If the answer is yes, then you are running an aggregate trade surplus. We should expect to see you building savings and reducing existing liabilities or otherwise growing wealthier. If the answer were no, then we should expect to see dissaving and increased borrowing, i.e. you’re growing poorer.

This is true for the individual household, the individual firm, and for each individual government. A country is just the aggregation of all households, firms, and governments within its jurisdiction. This concept being true for the individual parts doesn’t inherently mean that it will always be true of the whole. Thinking that way can lead to the fallacy of composition. However, in this case, it is true. If a country imports more than it exports, that is a sign that it is consuming more than it is producing in aggregate. Gross Domestic Product is the aggregation of all final consumer spending, all final capital spending, all government exhaustive spending, and all net exports (exports – imports). This embodies the concept of the “circular flow” model which suggests that production is what begets the income sufficient to consume what was produced.

Thus, total production is reflected in each component of GDP, just like total consumption is reflected. Total private domestic investment shows the market value of all final capital that is purchased in a given year by domestic citizens/firms. Total private consumption shows the market value of all final consumer goods that are purchased in a given year. Imports are subtracted from GDP because we want to remove the value added to the supply chain that is sourced from overseas. What is left is the total value added from domestic productive activities. Therefore, Private Consumption plus Gross Private Domestic Investment plus Exhaustive Government Expenditures plus Exports equals the total market value of all domestic production. Inversely, Private Consumption plus Gross Private Domestic Investment plus Exhaustive Government Expenditures plus Imports equals the total level of domestic spending. Removing like variables, we find that the balance of trade (Exports – Imports) showcases whether domestic production exceeds or lags behind domestic spending.

If a country spends more than it produces, it must fill the gap through dissaving or borrowing. The free traders will argue that this is a net good. A trade deficit means a capital surplus. When we buy more from overseas than we sell, we are sending U.S. dollars abroad to foreign households and firms. They aren’t just going to sit on that money, they are going to reinvest that into U.S. financial markets, i.e. purchase U.S. Treasuries, corporate and municipal bonds, and stock, or even directly purchase physical assets like land or capital. This capital surplus enables us to continue spending even beyond our limitations, and the result is that we get more material goods/services, which is what really makes us wealthy.

The problem with this argument is that it doesn’t examine itself in the inverse. If foreigners are reinvesting the deficit back into the U.S., then they are purchasing American assets and/or lending American consumers/firms/governments credit. In fact, this is quite literally what it means. When foreigners purchase U.S. Treasuries and corporate/municipal bonds, they are lending money to federal, state, and local governments, as well as corporations. When they purchase U.S. stock or physical assets, they are reducing the amount of assets we domestically own. In other words, yes, they are filling the gap and permitting us to spend beyond our need, but in the same way that Visa permits a household to continue to live outside its means, by impoverishing the household with increased debt, and reduced future savings due to interest expenses.

This is precisely what we have seen since 1975. In 1975, total debt outstanding, including federal, municipal, household, and non-financial business, was $2.127 trillion, or 133% of Gross Domestic Product. Today, total debt exceeds $84.4 trillion, or 268% of GDP. This carries a real economic cost for the nation. Debt requires the repayment of principal and interest, while asset ownership requires the payment of dividend (interest) to the owner, and that collective interest weighs down our national cash flow. A disproportionate flow of our domestic output now flows to foreigners overseas versus downstream to our citizenry. This is not sustainable. A country, like a household, a firm, and a government, cannot operate on chronic deficits forever. You cannot continue dissaving and borrowing to an infinite degree.

This imbalance also facilitates increased “financialization” of our economy, wherein financial capital is concentrated in the U.S. securities market, rather than physical capital, due to inflated investment returns. This leads to an emphasis on “short-termism”, wherein firms will shift resources towards financial securities, rather than physical capital production, because it increases short-term profits, satisfying the interests of the shareholders. This trade deficit facilitates this financialization, since foreigners are taking the surplus of U.S. dollars flowing overseas and recycling them back into U.S. securities markets, thus driving up the demand for U.S. equity and credit, resulting in asset-based inflation.

The second way in which this deficit increases financialization and facilitates the increased indebtedness of the country also ironically negates the key advantage of free trade. The foremost argument for free trade is that by substituting expensive domestic supply chains for cheaper foreign ones, you reduce the cost of production, leading to increased supply and a lower market price for consumers. This is true in a microeconomic manner. However, when you are running a chronic deficit and increasing the rate of domestic borrowing and dissaving, you must fill the U.S. dollar deficit, as velocity is not sufficiently sustaining the increase in output, and the increased demand for credit would naturally inflate the interest rate, acting as an equilibrating mechanism against this imbalance. The only way that the central bank can “grease” the wheels is through monetary inflation.

From 1959 (the earliest Federal Reserve reports M1 Money Supply) to 1974, M1 rose by 4.42% each year on average. Between 1975 and March 2020 (before the stupidity of Covid), M1 rose by a broader 6.23%. Inflation is a monetary phenomenon. If you print more money, you devalue the purchasing power of each unit of currency. Thus, while free trade does lead to price deflation on a microeconomic scale, it is dwarfed by the monetary inflation necessary to support such a chronic deficit on the macroeconomic side. This is why we haven’t seen the cost-of-living decline since 1993. This enhances the financialization problem as all new money is created in the “primary dealers’ system” of Wall Street. As price inflation, brought about by monetary inflation, increases, high-asset individuals will place dollars where it can outpace said inflation, namely U.S. equities, further enhancing the demand, driving up the price of stocks, becoming a self-fulfilling prophecy.

This also enhances inequality. When money is injected into an economy and filters into the consumer budget, the rate of inflation will not be uniform across all goods and services. This is because the consumer is not spending this money uniformly but rather prioritizes certain expenses as they do in their daily budget. Things like housing, electricity, groceries, and healthcare will see hotter demand than less frequent expenses like electronics, new automobiles, and furniture. While the Consumer Price Index has increased at an annual rate of 3.68% since 1974, the median sales price of a home rose at a faster 4.79% rate. The cost of medical care saw annual inflation of 5.10% over this period. This is important to note, because nominal median personal income has increased at a compounded rate of 4.28% each year, slightly higher than the rise in general prices, but not compared to these core expenditures. The result is that these core goods eat up an increasing share of total income, suffocating discretionary resources, and inducing lower personal savings.

This is not a sustainable trajectory. The response to this mess is that markets will naturally equilibrate. If a country continues to run sustained current account deficits, then the supply of that country’s currency within exchange rate markets will increase, as buyers are dumping the national currency for foreign currency to purchase that country’s goods and services, resulting in depreciation in the exchange rate. This then makes the nation’s exports more attractive, while simultaneously making foreign imports more expensive, naturally closing the current account deficit.

The problem with this is twofold. First, we no longer operate under a unified global monetary system. For much of modern world history gold and silver acted as the common medium of exchange. Various States would have different metrics of coinage, but the underlying metal was the same. Each country today operates a national fiat monetary system that can more easily be manipulated for its domestic interests. If we have two countries, the United States and the United Kingdom, and the former maintains a current account deficit with the latter, then under economic theory, there would be more U.S. dollars in the exchange rate market relative to British pounds, resulting in a depreciation in the value of the U.S. dollar relative to pounds. This would make American exports cheaper to the Brits, and British exports more expensive to the United States, closing the deficit. However, the Bank of England could just purchase U.S. dollars as central bank reserves, driving up the demand for the dollar, causing an appreciation in the currency’s value, negating the equilibrating effect, ensuring that the account deficit is sustained.  

Other, more overt, measures that London could take is to enshrine non-tariff barriers that achieve the same objective, but that are harder to scrutinize under the World Trade Organization’s rules and procedures. For example, you could require that all cars sold in your country meet certain corporate average fuel economy standard (CAFE) standards. If these standards are higher than those in a trading partner’s country, then the result is a de facto import tax. This is because of the concept of economies of scale.

If the primary market of your (United Kingdom) automotive manufacturers require a high CAFE standard, then they can produce those vehicles at scale, reducing the average unit cost. The importing company (Ford), whose primary market (United States) uses a lower CAFE standard, will have to decide whether to produce at scale the CAFE standard geared for American markets, or at scale with those at the UK standard. They will obviously choose the former as lower CAFE standards are generally cheaper. This means they will have to individually adjust exported cars to meet the UK’s standards, resulting in an inflated cost. This then puts Ford at a disadvantage with their UK competitors. London can hide behind environmental justifications for the non-tariff barrier, but the outcome is protectionism all the same. America’s trading partners have thousands of non-tariff barriers that collectively put American exporters at strategic disadvantages, tipping the scales, and preventing a natural resolution to trade deficits.

Secondly, some countries just have such a stark comparative advantage of producing goods, due to low labor costs and non-existent regulations with which the domestic markets cannot compete. David Ricardo, the pioneer of comparative advantage, recognized that capital could flow to those countries where wages are lower. For example, in his Political Economy, he recognized that capital could flow from Britain to Portugal. However, he dismissed this in reality due to a sense of moral duty and foreign aversion. “Experience, however, shews, that the fancied or real insecurity of capital, when not under the immediate control of its owner, together with the natural disinclination which every man has to quit the country of his birth and connections, and entrust himself with all his habits fixed, to a strange government and new laws, checks the emigration of capital. These feelings, which I should be sorry to see weakened, induce most men of property to be satisfied with a low rate of profits in their own country, rather than see a more advantageous employment for their wealth in foreign nations.”

Mr. Ricardo would be quite sorry to see the state of American trade. Unlike his prediction, men were not swayed by patriotic loyalty when measured against the self-interest of profit. Contrary to Ricardo’s assumptions, and to the main economic models that have arisen since, nations do not merely specialize based on their factor endowments. Rather, when capital is permitted to be mobile, it will flee to those nations where labor is cheap. The result is that the industrial base is hollowed out, and the nation is driven towards service-based employment. The problem is not just a decline in employment, but a subversion of supply chains to foreign nations, oftentimes adversarial to the nation. This is why liberal trade has always been a farce. It is a policy that benefits multinational corporations, not the nation, and certainly not the families that comprise it.

This is why tariffs have been the heart of the American System from Hamilton to McKinley. They disincentivize capital flight, incentivize domestic consumption, and raise revenues for the federal government. The arguments against tariffs are quite hollow. Opponents argue that they are both inflationary and contractionary. Basic Economics 101 would substantiate this notion. A tariff is a tax that will reduce the profit margin, regardless of price, on the sale of a good. This reduces the incentive to produce, resulting in a lower supply, and therefore a higher price and lower quantity sold. However, this is both an oversimplification and a static view of the market.

Protective tariffs are designed to induce a substitution effect. The goal is that by artificially raising the price of imports, domestic importers will substitute for domestic supply chains. This could have an inflationary and contractionary short-term effect, depending on how elastic the demand is for that good. Elasticity is how sensitive the consumer is to a change in the price of the good. Very elastic demand means that consumers are highly sensitive to changes in the price. Inelastic demand, inversely, means consumers are insensitive to price changes. If a good has elastic demand, then they have every incentive to not pass along the added cost to the consumer as it would actually reduce revenue to increase the price. This is because the increase in price corresponds with a greater than proportionate reduction in quantity sold. Thus, the importer is price conscious. If the demand is inelastic, the importer is less concerned about the price to the consumer.

Most goods and services have elastic demand at the point of final consumption. Surprise, surprise, consumers are sensitive to price changes. However, that isn’t inherently true earlier in the supply chain. Production requires high quantities of capital, which takes both time and money to acquire. This makes short-term substitution costly to an importer, thus making them inelastic. The result is that the importer won’t have rapid substitution to domestic industries when a tariff is first applied, so you won’t see widespread reductions in imports early on. Simultaneously, we shouldn’t expect significant price increases either. The importers’ customers are price-sensitive, so they have an inherent incentive not to pass those added costs on down the supply chain, or face falling revenues. The result is that you should see a contraction in profit at the importer stage in the short run. Neither significant contraction nor inflation.

As you move beyond the short term, importers will become more elastic as domestic suppliers can more adequately adjust production for increased demand, permitting greater substitution. This will be inflationary, as increased demand requires an increased price to incentivize greater resource allocation for production. However, it is not contractionary, but expansionary. In the long run, as major capital projects can be completed, substitution becomes more profound, and we should actually see deflationary forces at work. This is because higher domestic production yields higher domestic profits, enabling greater capital investment. Higher investment leads to both higher capital accumulation, and increased development of new technologies. A larger and more advanced capital stock drives up productivity, leading to an increase in aggregate supply, resulting in greater output, and a deflation in prices. This is compounded by the impact that import substitution has on the current account deficit. A declining current account deficit results in a fall in the domestic demand for credit, reducing the natural rate of interest itself, inducing greater domestic investment. This is why the United States enjoyed moderate inflation, or even natural deflation, during periods of sustained high protective tariff rates (1870s through 1900s).

Opponents of tariffs will oftentimes point at two periods of calamity as examples of the damage of tariff policy. The first, is the McKinley Tariffs of 1890 and the subsequent inflation experienced from 1891 to 1893, and the disastrous Panic of 1893. The notion is that the large increase in import tariffs drove up prices as competition declined, sending the economy into a nosedive. However, as the late economist Milton Friedman noted, inflation is “always and everywhere a monetary phenomenon.”

The same year that Congress passed the McKinley Tariffs, they also passed the Sherman Silver Purchase Act. This law required the United States Treasury to purchase $4.5 million in silver using Treasury notes (the basis of the paper currency prior to the Federal Reserve) each year. This massive expansion in the money supply resulted in a devaluation of the U.S. Dollar and an inflation of prices. This rapid inflation led to an expansion in credit, triggering a short-term boom in the economy, that eventually reversed as banks became overleveraged. Credit was liquidated and the money supply collapsed, triggering a deep depression that rocked the American economy.

Yes, the McKinley Tariffs should have resulted in some short-term inflation as importers substituted for domestic alternatives, but this price hike would have been selective to import-heavy supply chains, not universal across the economy. Furthermore, it should only have induced a one-time hike, followed by price moderation. Broad increases in the cost of living can only be caused by an inflation of the money supply.

This is why when President William McKinley was elected in 1896, he passed the Dingley Tariff Act of 1897. This tariff schedule was the highest in American history, was sustained for twelve years, and corresponded to twelve years of price moderation and economic expansion.

The other example of tariffs “wreaking havoc” upon the American economy was the infamous Smoot-Hawley Tariff of 1930. Opponents of tariffs argue either arrogantly that these tariffs caused the Great Depression, or more tamely that they intensified it. The reality was that simultaneous to the passage of this bill, the money supply was cratering as nationwide bank runs were sending the financial system into a meltdown as credit was liquidated and savings vanished. You will not have an economy that hums along when one-third of the money supply disappears in a matter of two years.

The bank crash was triggered by the instability of the suicidal British gold reserve system of 1925. The United Kingdom wanted to have its cake and eat it too in the aftermath of the First World War. They wanted to maintain the original value of the British pound (convertible to gold) without reducing the physical supply of British paper notes. This is an unsustainable proposition. Their attempted solution was to fix the price of British notes to the pre-war gold parity, while fixing the exchange rate of other European currencies to the British pound. This enabled Britain to sustain the gold parity at home by exporting their inflation to the continent. However, the socialist policies of the British Labour Party led to a stagnant economy during the 1920s.

Simultaneously, the European countries pyramided their own currencies on top of this inflated pound. The result is that there was infinitely more paper currency in circulation than gold sufficient to redeem that currency at face value. Savers soon realized this scam and began a global bank run, beginning in Austria and spreading across the continent, before crossing the English Channel to the United Kingdom. Thousands of banks collapsed as they lacked sufficient money – gold – to meet their deposit obligations. Overnight the money supply collapsed.

The United States wasn’t spared from this horror due to the failures of the Federal Reserve. Federal Reserve Bank of New York President Benjamin Strong tried to rescue the British through emergency Open Market Operations (purchasing bonds using newly printed money) to try and weaken the value of the dollar and stabilize the British pound in the global exchange market. However, this led to money circulating in Wall Street through margin loans, producing a euphoric stock market boom.

However, the boom soon became unstable as credit levels exceeded the total supply of money in the economy. As investors realized that stock valuations were far higher than corporate profits could hope to achieve in the short-term, investors began to dump stocks, triggering a mass stock market crash. This left margin loan borrowers underwater, triggering bankruptcy and liquidation of credit. The banks that had used depositors’ money to make these loans found themselves insolvent. Consumers ran on the banks and the nation’s financial system imploded. Thus, the Great Depression was not caused by the Smoot-Hawley Tariff, but by the predictable failures of central banking, fractional reserve banking, and fiat money.

Opponents argue that Smoot-Hawley led to a collapse in trade, particularly with Europe, due to a corresponding trade war as countries responded with retaliatory tariffs. However, being realistic, the dramatic drop in aggregate demand that follows a massive decline in the money supply, would have driven exports from the United States down as European consumers became increasingly unemployed and suffered falling family incomes.

What Smoot-Hawley likely did do is help stabilize the U.S. dollar. The United States was far more leveraged preceding the collapse than Europe. Therefore, as the correction unfolded, the U.S. saw a greater decline in the money supply than its European counterparts. This would result in the American Dollar appreciating disproportionately to European currencies. Appreciation of the value of a currency makes that currency more expensive to acquire, which, in turn, makes that nation’s exports more expensive and foreign imports cheaper. This would lead to a worsening current account balance, resulting in more gold flowing out of the country. This would actually make the financial system more insolvent. By implementing tariffs on imported goods, Smoot-Hawley artificially increased the cost of imports, offsetting this bias. The result is that while exports fell 66% (which we would expect anyways), imports fell 70%, resulting in the current account remaining a surplus, enabling a net inflow of gold.

Thus, tariffs were not the cause of the economic calamities of 1893 or 1931. Tariffs have been a driver of economic prosperity going back to the days of Alexander Hamilton. It is time for the United States to embrace the economic wisdom bequeathed to us by our forefathers, rather than relying upon distorted understandings of Adam Smith and David Ricardo.

President Trump needs to lay this argument out as clearly and simply as possible. This is indeed an America First policy. It is indeed a pro-worker policy. Understandably, many of these benefits aren’t noticeable in the short run as it takes time for substitution to generate increased domestic production. This is why if I were President Trump, I would couple my tariff policy with immediate financial relief for American families. I would propose to Congress that they codify the Trump IEEPA tariffs, to eliminate uncertainty, and link it with an expanded Child Tax Credit of $5,000. This immediately provides huge relief to American families that drive this economy, and who have been severely impacted by the Biden era inflation.

The Tax Foundation estimated that a 15% minimum tariff rate would raise $2.9 trillion in revenue over the next ten years. The Committee for a Responsible Budget has estimated that expanding the Child Tax Credit to $5,000 and making it fully refundable would cost the Treasury about $2.9 trillion over the next decade. Therefore, we could offer the taxpayers these comprehensive tariffs in exchange for an expanded tax credit that more than compensates them for the short-term increase in cost from the tariffs and helps offset the burden of the Biden inflation. This gives the American people buy-in for the tariff policy for the short-run, so that the nation can yield the benefits from long-term substitution.

This is the message I would bring to the American people to convince the public that this crucial and necessary tool needs to become the foundation of our economic arsenal moving forward.