Why is Donald Trump such a big fan of tariffs, and what exactly do they accomplish? A tariff is a tax on imported goods and services. Tariffs are used to raise revenue for the government and to protect domestic industries from foreign competition. President Trump is running the United States like a business and believes that he can make the US great again by doing the following: protect domestic industries by raising tariffs on imports; lower taxes on the US consumer and companies; and prevent illegal immigration. He believes that a lot of US taxpayer money is wasted on foreign aid programmes, as well as inefficient initiatives like diversity, equity and inclusion (DEI). He also believes that membership of international organizations like the World Health Organization, UN Human Rights Council, and even NATO, offers no benefits to the US and that these organisations are merely taking financial advantage of the US taxpayers.
So what does a tariff war look like? Well, it goes a bit like this: I want to protect my country’s steel industry and motivate companies to produce steel domestically, so I levy a 25% import tax on any steel being imported from a specific country, let’s say China. So if you are an American company importing steel, you suddenly have to pay 25% more for your imports. You can either find an alternative supplier in the US; or you can raise the price of your products to maintain your profit margin (which will increase inflation); or you can keep your price the same and lower your profit margin (which will impact your share price). China will then reciprocate by levying a 25% tariff on their imports from the US, such as agricultural products. The Chinese company importing such products will have the same choices as the US steel importer. The end result in both countries is a potential increase in inflation due to higher prices; companies going out of business because they are very price sensitive; and even a recession because consumers are being stretched too far. The longer these tariff wars continue, the more casualties there will be, just like in a conventional war.
The question is, can the US President unilaterally impose tariffs? The answer is yes. While the US Constitution grants the power to levy tariffs on goods to Congress, Congress has delegated some of that power to the Executive Branch over time. This law states that the President can raise tariffs on imports that pose a threat to national security. Section 232 allows the President to implement these tariffs without the approval of Congress, following an investigation by the Department of Commerce.
The problem for Donald Trump is that he has also promised to lower inflation and reduce the national debt. Tariffs will most likely increase inflation so he plans to counter this by lowering taxes, making companies more efficient, and using the revenues from the tariffs to subsidize some sectors that will be impacted. Can the US President lower taxes? Tax laws are made by representatives in Congress and the Senate. Congress puts forth a bill, they ratify it, and then it goes to the Senate. If the bill passes the House and Senate, it will then head to the President’s desk to be signed into law or vetoed. The President, however, does have tremendous powers with the executive order capability and can introduce some tax changes. The House and Senate can undo an executive order the next day if they wish to do so, but currently the Republicans control the White House, the Congress and the Senate, so yes, Donald can lower taxes.
As with any other war, whether conventional, currency, psychological, etc., both sides will suffer but the one holding the best cards will eventually be the winner. President Donald Trump doesn’t think like a diplomat, he sees everything as a business negotiation. This creates a lot of uncertainty, which translates into investment volatility. We have seen investment markets gyrate substantially over the last week or so, leaving us all feeling a bit queasy, but eventually Donald will settle on something that is palatable and the economic powerhouse that is the USA will continue on its winning ways. Below a graph of what happened with shares during Trump’s first term and now.
