Once again, I have decided to pontificate on something I really don’t understand. The recent chaos associated with the Administration’s threats and ultimate dramatic expansion of our tariffs has forced me to do some reading on three semi-related topics – the Federal deficit, our trade balance deficit, and tariffs. I think it is appropriate for me to record several relevant bits of information that I have obtained.
One analyst chose to describe our current situation as a major inflection point in our perception of the “World Order”. He subdivided the period since the end of World War II into two distinct world orders – one following the end of the War initiated by the Bretton Woods Accord in 1944, and the “Neo-Liberal World Order” which replaced it in the 1970s. His opinion is that 2025 is the beginning of a successor to Neo-Liberalism.
In an effort to avoid the economic chaos that followed World War I, representatives of the forty-four Allied nations met at Bretton Woods, New Hampshire, and produced an accord that governed the World Order following the end of the War. It established the U. S. dollar as a reserve currency redeemable (thirty-five dollars per ounce) in gold, and fixed values for all other currencies relative to the dollar. Coupled with the Marshall Plan and improved access to U. S. markets, it laid the groundwork for global prosperity in the decades to come.
In response to increasing inflation and the threat of a currency crisis, on August 15, 1971, President Richard Nixon announced a series of actions which included removing U.S. currency from the Gold Standard. This initiated a round of discussions that culminated in a different World Order, one focused on globalization, that included low tariffs, free movement of capital internationally, and flexible exchange rates between national currencies.
Returning to our original topic — the Administration has announced, and renounced, and re-announced a confusing set of tariffs in the past three months. Effective on August 1, 2025, the current announced tariffs average 18.3%, compared to about 3.0% in recent years. One analyst believes the apparent chaos that this has produced is the first step in a well thought out plan. Steven Miran, Chairman of the Administration’s Council of Economic Advisors, published such a plan in November, 2024, in a document entitled “A User’s Guide to Restructuring the Global Trading System”. Based on concern that our manufacturing capability has atrophied so far that we would be unable to defend ourselves in a prolonged war against a major industrial power, it anticipates using tariffs as a negotiating tool with the ultimate goal of establishing a new trading system in which the United States is the leader with numerous satellites (in contrast with trading partners) and a greatly weakened dollar. The consequence of the weakened dollar is increased competitiveness of our products in the world market, thus resuscitating our manufacturing capability.
Normally there are two purposes for tariffs – to generate revenue for the government or to reduce competition for domestic suppliers. In this case we have been told that the primary purpose is to encourage investment in manufacturing in this country, thus generating jobs in that sector. It is not obvious to me that such an effect can be anticipated. Let us consider the situation with Japan. The Administration has just announced a “deal” with Japan that includes a 15% tariff on all goods imported from that nation. It is unlikely that Japanese suppliers will reduce their price to importers sufficiently to absorb that amount of mark-up. Assuming that is true, it is up to the American consumer to decide if he/she is willing to absorb an additional 15% price increase or to purchase a domestically produced product at a premium. Either decision results in a decrease in standard of living for the consumer.
Proponents of this policy contend that the protective tariff will motivate companies to invest in manufacturing facilities here, to take advantage of the penalty on their foreign competitors; I doubt that the 15% advantage is sufficient to cover the difference in labor costs (a factor of 3) between the two countries. In addition, the bulk of the consumer items that we import are being produced in highly efficient automated factories. The capital cost of replicating these facilities in this country and the lack of skilled technicians here are significant disadvantages. I watched an interview with the CEO of Apple in which he explained why their I-phones were manufactured in China. In that authoritarian country the government consciously promoted high-tech industry by providing massive support – training large numbers of technicians, ensuring an affordable supply of energy and raw materials, and assuming expense of things like healthcare – all of which made it easier for entrepreneurs to build and operate modern facilities.
The original tariffs announced on “Liberation Day” apparently were based on the existing negative trade balance between the United States and each of our trading partners. The highest tariff proposed was on Sainte Pierre and Miquelon, two tiny French islands in the North Atlantic. In 2023 we imported $54,000 of goods (mostly hand tools) from them and exported $124,000 worth of goods (mostly computers) to them, a tiny positive trade balance. It is hard to believe no one in the Administration caught this obvious error. Even worse is the case of Heard and MacDonald Islands, an Australian territory in Antarctica populated only by penguins; they were taxed at the minimum (10%) rate. One wonders whom we will send to negotiate with them. All of which highlights the lack of thought that went into this policy.
Nothing I have been able to read has changed my initial opinion that this entire system of tariffs is equivalent to a sales tax on our consumers. The revenue it generates will reduce our annual deficit somewhat, at the expense of consumers, but will almost certainly do nothing to increase our manufacturing capability.