The Golden Age

The president celebrated Liberation Day by announcing an avalanche of tariffs on dozens and dozens of countries.  His plan has evolved.  Tariffs to stem the flow of fentanyl across the border, tariffs to return all manufacturing to the US, tariffs to punish our adversaries, tariffs to punish our friends, tariffs to make us rich and prosperous and to return America to the late 1800s; a time when tariffs financed the government.  

JP Morgan Wealth Management analyst Michael Cembalest had this to say - This borders on twilight zone territory. 

To be clear, a tariff is a tax paid by an importer on a product or service originating overseas.  It is a barrier to trade and a useful tool if applied selectively.  A trade deficit occurs when a country imports more goods and services than it exports.  In other words, the value of what the country buys from other countries is greater than the value of what it sells to them.

                                            If imports > exports, it's a trade deficit

                                            If exports > imports, it's a trade surplus

Is a trade deficit bad?  It depends.  Trade deficits in and of themselves are neither good or bad; its impact depends on what is causing it and what else is happening in the economy.  If you are like me you likely have a trade deficit with your favorite grocery.  Foreign trade frequently works the same way.

The administration's calculation of 'reciprocal tariffs' is flawed because it is not based-upon tariffs (a trade barrier) but on trade deficits (balance of trade).  The calculation goes like this:  The 'tariff rate' for each trading partner is a function of trade aggregates - specifically, the deficit divided by US imports, then divided by one-half, with a minimum of 10%.  

Remarkably, no allowance anywhere is made for specific barriers such as actual tariffs, digital services taxes, value-added taxes or monetary policy.  Furthermore, the value of services are omitted from the Trump calculation.  Only the trade deficit in goods is measured.  Avocados are quantified and the intellectual capital and contributions of a software engineer are not.  Considering that our GDP (total economy) is 68 to 70 percent services this omission has left the economic community scratching their collective heads.

For example, Singapore is a relatively free-trade-oriented country, while Brazil makes considerably more use of tariffs and other trade manipulations.  However, both end up with the 10 percent rate because of their goods trade balances with the US.  By contrast, Vietnam, which exports a great deal to the US  yet has worked to make its policies amenable to the US gets no credit for the effort.  Trump announced a 46 percent tax on all Vietnamese imports.

In a recent piece published by Axios, flaws of this calculation reach all the way to Madagascar; a small, poor country with an abundance of vanilla.  The US is a large and wealthy country with a sweet tooth; consequently, there is a natural trade to be made.  They send us their precious vanilla pods, we send them dollars they need for day-to-day necessities.

By the logic of the Trump administration's reciprocal tariffs that's not a natural trade at all. To quote Commerce secretary Howard Lutnick on CNBC this is evidence of tiny Madagascar picking on us.  Because it runs a trade surplus with the United States, Madagascar is being hit with a 47% tariff, not only on vanilla but also on everything else it exports to us. 

Given that Madagascar has precious little need for US exports, that means in practice that the tariff has to be big enough to bring that trade deficit down to zero and stop Americans from consuming more than a thousand tons of vanilla every year.  Or switch to domestically produced artificially-flavored vanilla. 

So let's be truthful; a tariff is a tax on consumers.  And while this tax won't be a problem for a billionaire it will be a costly annoyance to the middle class.  It will be a burden to the aspiring middle class and devastating to everyone else.

Former Treasury Secretary Lawrence Summers said it best - It’s now clear that the Administration computed reciprocal tariffs without using tariff data. This is to economics what creationism is to biology, astrology is to astronomy, or "RFK thought" is to vaccine science. The Trump tariff policy makes little sense EVEN if you believe in protectionist mercantilist economics.