The Absurdity and Calamity of US Tariff Policies

US tariffs are poorly designed, badly implemented and are already damaging both the US and global economies.

US tariffs are poorly designed, badly implemented and are already damaging both the US and global economies. The economic damage will only get worse as uncertainty further undermines business and consumer confidence and results in dislocation of global supply chains.

Determining the extent of economic damage, and financial market implications, is difficult because we don't know what tariffs will actually be implemented or how many backflips there are before then. There’s no clear, defining strategy. The justification for tariffs oscillates between reinvigorating US manufacturing, raising revenue to fund tax cuts, the cost of the US providing global security, the provision of the US dollar to support global trade and financial markets, and broadly addressing an 'unfair' trading system. Different justifications would lead to different structures of the tariff regime. Adding to uncertainty, key individuals in the administration have different goals for tariffs.

1. The Obsession with Bilateral Trade Deficits Is Baseless

President Trump's tariff obsession is rooted in a dislike of trade deficits. The United States has run a trade deficit since the mid-1970s. He attributes this deficit to unfair trade policies in other countries and an overvalued US dollar, resulting from US dollar demand given its role in international trade and finance. But the trade deficit also depends on US domestic conditions, notably the US Government's huge fiscal deficit, currently 5% of GDP.

Balanced National Trade Doesn't Need Bilateral Balanced Trade

Even if balanced trade at the country level was desirable, there is no reason for this to apply country by country.

Countries with balanced aggregate trade still run large trade deficits or surpluses with almost all trading partners. For example:

Belgium had balanced trade with just two countries.
Canada, Finland, South Korea and South Africa had balanced trade with just one country each.
Each of these five had significant bilateral trade imbalances with over 150 trading partners.

The US goal of balanced bilateral trade with every country is, frankly, bonkers.

2. The Calculation of Tariff Rates Is Absurd

Bilateral trade balances are meaningless but determine the US 'reciprocal tariffs'.
Even countries the US has a trade surplus with (like Australia) received a 10% tariff. If Australia used the same logic, it would apply a 50% tariff on US goods.
The US has a surplus in services trade of 0.25% of GDP (partly offsetting the goods trade deficit of 1% of GDP) but ignores services trade entirely in calculating tariffs.

3. The Tariffs Are Badly Designed, Reflecting Unclear and Inconsistent Goals

The US tariff regime mixes:

Tariffs on specific goods (steel, aluminium, vehicles)
Tariffs on specific countries (Canada, Mexico, China, etc.)

But many of the objectives are in conflict. For example:

If tariffs raise revenue but don’t raise US prices, US producers won’t be more competitive.
If tariffs do increase US production, imports fall — reducing tariff revenue.

Poor Design Elements

Different tariff rates distort trade with little benefit — e.g. Apple plans to ship iPhones from India instead of producing in the US.
High tariffs are applied to goods the US can’t or won’t produce (e.g. minerals and shoes from China and Vietnam face tariffs of 145% and 46% respectively).
Tariffs are applied to inputs used by US manufacturers, increasing exporters’ costs.

4. The Effective Trade Embargo with China Will Be Disruptive

The 145% punitive tariff on China makes most Chinese imports prohibitively expensive. But the US is not ready to disengage.

China supplies 13% of US imports.
Over half of US imports (by component parts) are from China.
Alternative suppliers do not exist at scale.

Impact:

Finished goods shortages and price hikes will disrupt consumers.
Business sentiment and consumer confidence will be hit.
Inputs used in production (e.g. machinery, chemicals, pharmaceuticals) will be harder and costlier to obtain.

5. The Tariff Regime Won’t Survive, But Tariffs Won’t Vanish

The tariff regime is already being patched:

Reciprocal tariffs paused until 9 July (but 10% baseline remains).
Some electronics (phones, computers) exempted after consumer backlash.
Lobbying pressure mounts — e.g. partial rebates on car parts used in US manufacturing.
70 countries have shown interest in tariff negotiations — but deals take time (USMCA took 18 months).

Trump remains committed to tariffs as a revenue source and as a tool to promote manufacturing. He’s even floated the idea of replacing income tax with tariffs — though:

A 10% tariff raises ~$1.7 trillion over 10 years
A 20% tariff raises ~$2.6 trillion
Tax cuts already promised cost $5–11 trillion

6. What Does the Future Hold?

Expect:

More reversals and “deal-making”
Selective tariff reductions for critical goods
New tariffs to fill revenue gaps

The 1-week pause in reciprocal tariffs was reportedly due to bond market instability, which risked triggering a financial crisis.

Trump has shown more resilience during market volatility than in his first term. But should a financial crisis or deep recession occur, a rollback is still likely.

Outlook: