Published by AstroAwani, image by AstroAwani.
President Trump and his advisers haven’t got a clue about how tariffs are to be deployed in the first place.
Leaving aside that tariffs are becoming less relevant these days and have been coming down since the late 1990s onwards under the World Trade Organization (WTO) – the successor to the Uruguay Round of 1988 of which the General Agreement on Tariffs & Trade/GATT (1947) is the precursor – the original intent and purpose have been comically and brutishly obscured by the Trump administration.
The first and basic principle of tariffs is that they’re meant to be used as a shield and never as a sword.
That’s the whole point about using tariffs to protect and nurture domestic industries, especially the emergent and fledgling ones.
In short, tariffs already presuppose and imply the pre-existence of domestic industries. Either the tariffs co-exist with the domestic industries or the latter precedes the former.
In the case of Trump, he wants tariffs to induce the reshoring of overseas manufacturing (principally from China) back to the US. That’s not how tariffs work (or are meant to work) – from the perspective of both the tariffing (i.e., host) country and foreign direct investment (FDI)/multinational companies (MNCs).
Reshoring already presupposes and implies that the costs of production in the home country is higher than the host country. Couple this with the lack of an industrial policy that cuts or reduces transactional costs (which adds to the costs of doing business in the home country).
This is why MNCs reconfigured the supply chain (instead of reshoring and decoupling) by moving some of their operational bases to countries (other than China) with similarly lower production costs (i.e., relative to the US) under Trump 1.0.
And since manufacturing serves financial capitalism (returns to shareholders, etc.) rather than vice-versa in the US, reshoring is an intractable challenge.
Following on from the first basic principle that tariffs have never been meant to be weaponised in the first place is the second fundamental pillar.
And that is tariffs are certainly not meant to be leveraged as a geopolitical cum geoeconomic weapon/tool to extract concessions and secure a pre-bargaining/negotiating advantage over another country concerned.
You don’t use tariffs to impose your will on another country in the form of dictating the terms of the trade flows by reversing (or reducing) the trade deficit. In other words, tariffs aren’t the solution but the problem in the international trade (and investment) given the impact on the entire supply chain most of the time.
And this is why tariffs have always been applied in a selective, precise and targeted manner – with clear-cut industrial policy (i.e., pro-active, heavy and comprehensive State intervention) objectives in mind.
This means that high tariffs are not meant to be used to bully other countries into submission.
They’re only a temporary fix or measure solely for the purpose of shielding selected or targeted domestic industries concerned from foreign competition in the local market – a necessary evil and certainly not “the most beautiful word in the dictionary”, as per Trump.
Tariffs could be implemented under and together with what’s an import-substitution industrialisation (ISI) strategy as the initial phase. ISI would then lead up to the final phase, i.e., export-oriented industrialisation (EOI).
EOI is a natural/logical development given the need to procure and accumulate financial assets in the currency of the importing country – typically and eminently embodied by the US – as denominated in the USD (the world’s reserve currency).
That is, tariffs are not only meant to reduce reliance on imports but also to build up the export capacity as driven by domestic industrial policy coinciding with the objectives of MNCs seeking lower production costs as alluded to (and partly on the back of the strength of the USD relative to the host countries’ currencies as proxied by purchasing power parity/PPP).
Paradoxically, industrialisation can or should lead to the lowering of tariffs (for imports of capital and intermediate goods/inputs).
All of this serves only to underscore the contradictory nature of Trump’s tariffs.
As it is, the global reserve currency status of the US is precisely dependent on the trade deficit with the rest of the world (ROW).
The desire to accumulate USD arises from the fact that much of the invoicing and settlement in international trade is conducted in that currency.
Once again, tariffs as a form of protectionism have always been allied and coordinated with industrial policy and strategy (as alluded to).
Tariffs have always been implemented together with:
- subsidies, grants;
- soft loans (credit allocation by state-owned banks);
- tax incentives/reliefs (such as total or partial tax exemptions for a defined period, e.g., up to 10 years under a “pioneer status”);
- technical (e.g., transfer of managerial and operational know-how) and logistical (e.g., the provision of land that’re in proximity to port and airport infrastructure/facilities) assistance;
- administrative relaxation and acceleration (e.g., the shortening of the process of business registration, streamlining bureaucratic approvals and permits);
- urban planning (the design of an industrial area that’s agglomerated/clustered with the supply chain – upstream, mid-stream, downstream);
- government procurement (e.g., vendor supply chain programme);
- government ownership (total or partial, direct or indirect – especially of strategic industries);
- the State’s role as the buyer, seller and stockpiler of the last resort (resource allocation), etc.
Professor Dr Ha Joon Chang, the renowned economist known for his work on the history of tariffs has provided a very insightful tour de force in his Kicking Away the Ladder: Development Strategy in Historical Perspective (2002).
Hence, tariffs don’t/can’t function like (negative or reverse) tax cuts.
Even tax cuts don’t/can’t function properly and effectively on their own without being coordinated with deficit spending by the government (as the primary instance).
No US administration has ever relied on tax cuts alone.
Even JFK’s (John F Kennedy) tax cuts under the “New Frontier” and, specifically, under the Revenue Act (1964) that’s later signed into law by successor LBJ (Lyndon B Johnson) worked in tandem with his (i.e., JFK’s) stimulus programmes (as outlined in his “State of the Union” address to Congress on January 30, 1961 and Special Message to Congress on May 25, 1961) such as the Area Redevelopment Act (1961).
Even Ronald Reagan’s Reaganomics (“Let’s Make America Great Again”) via the Economic Recovery Tax Act (1981) had to pump-prime the economy indirectly via increased spending on the military (bastard Keynesianism) in the name of national security (by hyping up the threat of a nuclear Armageddon from the Soviet Union – in effect provoking and reinforcing the arms race) under the Strategic Defense Initiative (SDI) programme, otherwise also known as “Star Wars”.
This is precisely what Trump intends to do too (as he’s recently announced spending of up to USD1 trillion for the military).
Although Trump’s not ideological, he is hemmed in and surrounded on all sides by ideologues.
You have Peter Navarro (Senior Counselor for Trade and Manufacturing) alongside Robert Lighthizer (former Trade Representative under the Trump 1.0 administration) on the one hand with Scott Bessent (Treasury Secretary) and Howard Lutnick (Commerce Secretary) on the other (Elon Musk is arguably, perhaps, transactional too, like Trump).
Other than tariffs, the Trump administration (via Treasury Secretary Bessent) is banking on bringing the deficit down to 3% (which the Department of Government Efficiency/DOGE has been tasked to play a critical part – by shrinking the bureaucracy and, by extension, its payroll) and increasing oil production to 3 million barrels per day and achieving a 3% GDP (gross domestic product) growth (under the “3-3-3” economic plan).
But that’s lowering the deficit in the absence of a pre-existing industrial policy/strategy and in view of increasing prospects of a recession combined with sustained inflationary pressures, i.e., stagflation.
Following the sustained inflationary pressures, tariffs aren’t wielded to cause supply-chain disruptions/shocks as what’s precisely happening now.
Given the comprehensive and all-embracing nature of the tariffs and then too against the rest of the world (ROW), second-order inflationary effects are to be expected since the imports would go beyond finished or fully-processed consumer goods and cover the manufacturing inputs and materials (raw, semi-processed) also.
The markets have been pricing in stagflationary pressures as proxied by the jump in the yields of the 10-year USTs (US treasuries) which represent the first line on the long-dated sovereign bonds.
The 10-year USTs are typically used to benchmark market interest rates – principally by the commercial banks for loans and deposits as conditioned by their capital adequacy holdings (vis-à-vis term maturity matching) and, by extension and inclusion, the interest rate risk management strategies (via the held-to-maturity/HTM, held-for-trading/HFT and available-for-sale/AFS class of assets).
The surge in the yields of the 10-year USTs recalls the Truss-Kwarteng budget fiasco in September 2022 as well as the Silicon Valley Bank (SVB) debacle in March 2023 (e.g., see EMIR Research article, “The Silicon Valley Bank debacle”, March 21, 2023).
Within the fixed income securities asset allocation vis-à-vis the long-term end of the curve yield, the 30-year USTs are the most sensitive/vulnerable to interest rate changes as embodied by the convexity property of the price/yield relationship – positive correlation.
That is to say, given the longer-term duration, investors would demand higher asking yields (taking into account the present value/PV and discounting of the cash flows,including a higher inflation adjustment/calculation).
At the same time, the federal funds rate (FFR) vis-à-vis the coupon rate is also benchmarked against the yields of the 10-year USTs as part of the interplay between the FFR (a short-term rate reflecting the supply-side forces with market demand (proxied by the long-term yields set on 10-year USTs).
That is, instead of the usual anticipation of rate cut by the Federal Reserve (Fed), the markets are expecting a rate rise (to counter the inflationary pressures) under what could well be called the “inner inverted yield curve” (i.e., a yield curve within the wider long-dated bond term duration – rather than the yield differentials between the short-term USTs versus the long-term USTs).
Finally, what the Trump administration (and this applies to his ilk in the UK too – Nigel Farage, Richard Tice and Reform UK) don’t “appreciate”/“understand” is that the oil and gas market is a cartel (think OPEC – the Organisation of Petroleum Exporting Countries). Prices aren’t determined by market forces (of demand) but by production (supply).
Unless and until the US (or even the UK for that matter) sets up a national(ised) petroleum company (100% government-owned) that can dictate the price of oil and gas in the domestic market (leaving aside whether the same entity will also export or not), the domestic market will always be subject to the vagaries and volatilities of the price-setting market (OPEC).
The only solution is for the American oil and gas companies to go completely domestic (and this means saying sayonara to exporting more to Europe to replace Russia, for example).
What’s Trump’s endgame/game plan for the tariffs?
In the final analysis, it’s to do with showmanship.
Trump simply wants to leave his legacy with a loud bang, come what may.
And, of course, showmanship is precisely what fits the agenda of pretending to de-globalise and react to/counter the effects of globalisation whilst in reality still maintaining the underlying structural causes of neoliberalism in place.
Then too, Trump wants to do Jerome Powell’s job “for him” (if the Federal Reserve Chairman can’t be pressured into lowering the FFR).
If crashing or at least purposely trying to deflate the economy leads to Jerome Powell having to increase the FFR due to persistent stagflationary pressures/concerns, it’s game over for Trump.
Jason Loh Seong Wei is Head of Social, Law & Human Rights at EMIR Research, an independent think tank focussed on strategic policy recommendations based on rigorous research.
