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Tariffs Can Serve A Purpose

soybean field
Soybeans are among the American goods that have been hit with Chinese countertariffs.
Photo courtesy the United Soybean Board.

President Donald Trump’s decision to implement large and wide-reaching tariffs has caused a lot of distress. It may not be warranted.

At first, like many who oppose the president’s protectionist strategy, I thought of these tariffs as a terrible idea with little upside. But after some thought, I realized that they could have real value in shining a light on pressing international issues, such as China’s widespread theft of intellectual property. Forcing negotiation might be a good thing – as long as that is truly the administration’s goal.

The United States dipped its toe into the protectionism waters in January, with tariffs on solar panels and washing machines, but the strategy came to wider public attention with major steel and aluminum tariffs in March. The administration initially exempted Canada, Mexico and the European Union, but these exemptions ended in May. The steel and aluminum tariffs are now truly global.

But the biggest focus of trade policy was, and remains, China. In addition to the global tariffs, Trump announced $50 billion in tariffs on Chinese goods specifically; $34 billion took effect on July 6, with the rest slated for later in the month. The administration has since proposed another $200 billion in Chinese tariffs, and the president has said he is willing to go $200 billion higher, for a total of up to $450 billion. China has promised to retaliate again if the plan to add more tariffs proceeds.

In my view, there are two potential explanations for Trump’s approach. The first, and the one that I think is more likely, is that it is a negotiation tool. Imposing harsh tariffs always creates losers, by the strategy’s nature. Affected nations will inevitably impose countertariffs; we have already seen this happen. China has imposed more than $50 billion in tariffs on American goods. Canada imposed tariffs on about $12.8 billion in American goods as of July 1. Mexico has imposed tariffs on American pork, steel and a variety of other products, totaling about $3 billion. The EU announced $7.1 billion in tariffs of its own. Even if the specifics weren’t entirely predictable, the broad actions were.

If these measures and countermeasures get parties to negotiate, it could lead to a positive outcome for everyone involved. The stated goal of the Chinese tariffs, in particular, is to pressure China to halt intellectual property theft, open its markets to American companies and reduce its trade surplus with the United States. As I wrote in this space last year, Trump’s tendency to use the term “trade deficit” as a rhetorical scare tactic betrays a misunderstanding of what a trade deficit is and why it matters. But the overall idea of using tariffs to pressure China into acting as a better global citizen is not a terrible one on its face.

The other possible explanation for Trump’s broad approach is that the president wants to permanently reshape America’s economy and its labor force back into an image of former manufacturing glory. If so, I find the logic deeply misguided. The U.S. has a highly skilled labor force. Many of our biggest economic engines are companies like Apple and Alphabet (Google’s parent company). To the extent these companies make physical products, it is more economical and practical to use other countries’ infrastructure to do so, and tariffs will not change that reality.

Ironically, in the meantime Trump’s steel and aluminum tariffs have hurt some parts of the very manufacturing industry the president lauds. Raising the cost of key manufacturing materials has made some U.S. companies less globally competitive. And, of course, there are the effects of countertariffs; the president’s very public falling out with Harley-Davidson is a high-profile example, but certainly not the only one. Unwinding globalization, to the extent it is even possible, will have complicated effects, especially if the tariffs stay in place for the long term.

From the early days of his campaign to the present, Trump has tended to discuss trade in terms of winners and losers. If he’s approaching a trade war like a conventional war to be won through brute force, rather than a means of getting other economies to the negotiating table, I am less optimistic about the results.

There has been a lot of handwringing among those who oppose Trump’s tariff regime, which includes both political opponents (who will oppose virtually everything the president does) and allies who find Trump’s actions in conflict with their support of free trade. But, broadly speaking, so far very little has changed. Relative to the global, or even the national economy, the implemented changes are small. Individual people or businesses – especially those who rely heavily on a global supply chain that includes China – may already be feeling some pain, but most Americans are unlikely to have noticed any difference so far.

This could change, of course. If the tariffs expand, we may start to see prices rise significantly on everyday consumer goods. It is also likely to put increased pressure on industries including agriculture and automakers. If passenger car prices shoot up or Americans see their grocery bills spike, we will truly have cause for concern.

Tariffs are often easier to impose than to remove. The so-called “chicken tax” is a 25 percent tariff on imported trucks that arose from a dispute with Germany in the 1960s over American poultry exports. It remains in place, and has led both foreign and domestic automakers to create sometimes-tortuous supply chains to work around the tariff’s effects.

To deploy tariffs effectively, policymakers need an exit strategy. Trade controls are a sledgehammer, not a scalpel. Let’s hope those wielding them know the difference.

Managing Vice President Paul Jacobs, of our Atlanta office, is among the authors of our firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. He wrote Chapter 12, "Retirement Plans"; Chapter 15, "Investment Approaches And Philosophy"; and Chapter 19, "A Second Act: Starting A New Venture." He also contributed to the firm’s book The High Achiever’s Guide To Wealth.

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