Tariff Confusion: What’s Going On With Trump’s Economic Policy?
What an interesting week it has been for economic policy. Tariffs were threatened, introduced, delayed, and threatened some more. It’s not clear exactly what the end goal is for the Trump administration, and many on both sides of the aisle are concerned about the potential impact on American consumers and exporters alike. As of March 8th, here’s how the situation stands:
The sweeping 25% tariffs imposed on imports from Mexico and Canada were suspended just two days after they were announced, as markets suffered due to the confusion. However, President Trump denied that market reactions influenced his decision to suspend tariffs., instead citing the protection of American farmers and carmakers. This suggests that Mr. Trump is aware of the damage that these tariffs could cause, and yet a second round of tariffs is still in the works for April 2.
The back and forth, stop and start nature of the Trump administration’s decision making is being touted as a powerful negotiation tool, to stop the flow of fentanyl and illegal immigration into the country. And to a certain extent, this has been effective. Mexico has sent busted fentanyl laboratories, sent the National Guard to the border, and even agreed to have major cartel leaders extradited to the US. Whether this amounts to actual results remains to be seen, but an effort is certainly being made.
The other defined goals of the tariffs are shakier, and possibly even contradictory. If Trump wants companies to produce more of their products in the US, then consumers will buy more American-made goods. This is logical. But if consumers are buying domestic, the tariffs will generate less revenue. Countries will simply import fewer products if American consumers aren’t buying them.
There are also many lessons to be learned about tariffs from Trump’s first term. When tariffs were levied on China, economic studies showed that Chinese companies simply passed most of the costs on to consumers. American companies and manufacturers that use imported materials will also face higher costs, meaning that unless they too increase prices for the American market, their profit margins will suffer. Not to mention that the targets of tariffs will likely impose retaliatory tariffs on American exports, just as Canada has already done: a 25% tariff was imposed on Canadian electricity exports, affecting 1.5 million American households.
In terms of tariffs as a means for national security, decoupling from supply chains in foreign countries actually makes sense. But if this were a legitimate goal for the Trump administration, why would he want to get rid of the CHIPS and Science Act? This act by the Biden administration represented a strategic investment in America's technological independence—bringing semiconductor manufacturing back to U.S. soil precisely to protect against geopolitical vulnerabilities involving Taiwan.
Yet Trump's position creates a perplexing contradiction: while claiming to champion American manufacturing for national security, he seeks to dismantle the very legislation that successfully attracted semiconductor manufacturer TSMC's historic $100 billion investment. His theory that tariff threats alone will accomplish what substantial subsidies already have defies economic reality. Without the subsidies that offset America's higher labor costs, these companies would simply pass tariff expenses to consumers rather than relocating production. This fundamental misunderstanding of market dynamics not only threatens a critical defense industry but illustrates the flawed reasoning behind the broader tariff strategy.
Concerns over the fentanyl crisis and national security might be valid, but they don’t warrant disrupting historically friendly trade relationships with neighbors and allies. Especially when considering the harm that trade wars have caused in the past, the Trump administration should consider a more nuanced approach to trade that doesn’t harm American consumers and exporters.