Donald Trump’s tariff policy is a mess of contradictions, muddled thinking and confused objectives that has rocked global markets, seen a decline in the US dollar and permanently damaged confidence in American assets. Some overwhelmed fund managers are starting to think the president “might be insane”.
I can’t comment on Trump’s mental health, but his current tariff policy is so off-the-wall crazy that it comes as no surprise some people are questioning his sanity.
We’ve been given multiple reasons for the policy. It is variously to halt the supply of illicit drugs, to cut illegal border crossings, to raise revenue to replace federal income tax, to force companies to relocate to the USA, or simply as a punishment for ‘ripping off’ America in the past. There is no coherence to any of it.
His administration has been guilty of a series of missteps, blunders, gaffes and reversals during his first few months in office, but it is the tariff issue, which the president has been personally associated with and campaigned on for years, that threatens to expose his incompetence and erode support for his agenda.
Is the trade deficit really a problem?
In a recent FT opinion piece, Peter Navarro, the president’s trade adviser and the man behind the policy detail, accused other countries of using unfair tariff and non-tariff barriers as weapons “to strangle American exports”. He thinks international trade is “rigged against America”.
The US certainly runs a huge $1.2tn deficit in goods, sucking in vastly more in the way of raw materials, intermediate parts and finished goods than it exports. Trump’s solution is to apply “reciprocal tariffs” to discourage imports and force businesses to manufacture in the US.
This is wrong on multiple levels. Firstly, America’s exports mostly aren’t being depressed by tariffs. Japan, for example, imposes zero tariffs on imported cars, but US carmakers have less than a 1% market share. It’s not regulations, either. Mercedes exported 53,000 vehicles into Japan in 2024. It can be done.
Trump says Europeans “don’t take our cars”. He’s misinformed. The BMW plant in North Carolina, described recently by Navarro as a ‘scam’, is America’s largest exporter of cars by value. The $15bn plant employs 11,000 people and many more in local supply chains. It exports 225,000 vehicles per year, earning $10bn for the American economy.
Top export markets for the Spartanburg plant are Germany, South Korea, China, Canada, and Great Britain.
Japanese and European consumers aren’t opposed to imports either. Half the TVs sold in Japan are Chinese made, and Apple has 50% of the smartphone market. The problem is that US car makers are too expensive with questionable quality and reliability. This article in The Japan Times, explains it all.
In short, the issue has zero connection with tariffs and far more to do with other factors, principally that US businesses don’t want to put in the effort or investment.
How the tariffs were calculated – and why it matters
Secondly, the method used by the Trump administration to arrive at the ‘reciprocal tariffs’ is crudely over-simplistic and doesn’t take account of tariffs at all. The figures on the list brandished by Trump in the White House rose garden were simply the trade deficits (imports minus exports) expressed as a percentage of total imports from each of the 185 nations identified (including, bizarrely, a penguin colony in the Indian Ocean).
The US Trade Representatives (USTR) then published a formula using Greek letters to disguise the absence of any detailed thinking.
Brent Neiman, an economist whose research was cited by USTR, told The Times the administration has got it “very wrong”, adding, “Americans spend more on clothing made in Sri Lanka than Sri Lankans spend on American pharmaceuticals and gas turbines. So what? The deficit numbers don’t suggest, let alone prove, unfair competition”.
The ‘reciprocal tariffs’ were then calculated by dividing the deficit percentage by two, with a minimum figure of 10% bizarrely – even for countries such as the UK and Australia with which the US enjoys a trade surplus.
The questionable legality of Trump’s tariffs
Thirdly, the tariffs are probably illegal. The US had a free trade agreement (NAFTA) with Canada and Mexico, originally signed in 1988 but renegotiated by Trump in 2018 when it became the USMCA, after he had campaigned to bring back manufacturing jobs to the US and reduce the trade deficit with America’s two closest neighbours.
Trump essentially tore up the USMCA deal when he unilaterally imposed 25% tariffs on all imports from Mexico and Canada on 1 February, ostensibly to halt the influx of the drug fentanyl.
China, Canada and the EU are now taking action against the US at the World Trade Organization. They allege that the Trump administration has violated the rules of international trade set out in the 1947 General Agreement on Tariffs and Trade.
A group of Conservative lawyers from The New Civil Liberties Alliance (NCLA) is also challenging the administration in the US courts. The law Trump used to impose these tariffs by executive order, a sort of presidential decree, is the International Emergency Economic Powers Act, of 1977 (IEEPA) which is generally intended for sanctions and emergency national security threats, not trade policy. But using this avoids the messy business of getting congressional approval.
The NCLA says the IEEPA has never before been used to impose tariffs; indeed, the word ‘tariff’ isn’t mentioned anywhere in the legal text. What that law does do is allow the president – acting alone – to “regulate” a range of international economic transactions if the nation is faced with “an unusual and extraordinary threat”. Nobody knows what such a ‘threat’ could be.
A small business group is also suing the Trump administration on similar grounds.
The lawyers will argue the IEEPA doesn’t give Trump the legal right to impose any tariffs, let alone the swingeing, market-roiling levels with which he’s hit China and others. They may succeed.
Who actually pays the tariffs? (Spoiler: it’s not China)
Fourthly, Trump firmly believes these tariffs are paid by foreign exporters and could potentially replace income tax as the American government’s main revenue source. This is simply delusional. Tariffs are an import tax paid by the importer, with the largest portion ultimately paid by US consumers. The so-called ‘pass through’ rate – the amount of the tariff eventually seen by the final customer – is about 95%.
Tariffs are usually applied selectively to specific products to make imports artificially more expensive and protect a country’s domestic producers from what could potentially be unfair trade, using a subsidy provided by the exporter’s government, for example, to keep prices low. Trump has applied tariffs to all goods.
Apple, Nvidia, Dell, and other importers of smartphones, computers and servers have now been exempted from the 145% tariff on Chinese imports. This affects around a quarter of China’s $400bn exports to the USA. However, high-tech items are still subject to a 20% ‘Fentanyl Tariff’, according to the president in a furious Truth Social post, and could face further barriers in future.
The ‘pause’ resulted in an increase in America’s average tariff rate
The average US tariff-rate shot up from 2.5% to an astronomical 26.8% on Liberation Day – a figure not seen since about 1903. The potential impact of this huge increase on US industry sparked the sell-off of both US stocks and Treasury Bonds, coming close to triggering a meltdown and prompting Trump to execute a tyre-screeching U-turn one week later.
But the 90-day ‘pause’ he announced actually resulted in the average US tariff-rate increasing to 27%, according to The Washington Post.
How come? Because the tariffs on China were raised to an eye-watering 145%, and China is far and away the largest exporter of goods to America. The realisation that this will continue to wreak untold damage on US manufacturers and retailers has contributed to the continued slide in US equities, and was almost certainly responsible for the hasty announcement exempting some electronic goods.
More humiliating climb-downs will no doubt come again shortly.
Why tariffs won’t bring manufacturing jobs back to the US
Finally, the tariffs won’t work anyway. Molson Hart is the founder and president of Viahart, an educational toy company. He’s an entrepreneur with manufacturing experience in both the US and China. “These tariffs will not work,” he says. “In fact, they may even do the opposite: fail to bring manufacturing back, and make America poorer in the process.”
In a long blog post, he sets out 14 reasons why the tariff policy won’t succeed. He wrote the post when Chinese tariffs were 54%, a figure he said was far too low to make any difference, because US manufacturing costs were so high. Also, America no longer has the skills or the ecosystems to support complex manufacturing.
The US also lacks infrastructure, Hart claims. The amount of electrical power generated has barely changed in America since 2000, while China has increased output by a massive 400% over the same period. China now generates over twice as much electricity per person today as does the United States.
But the biggest problem lies in the labour market. Chinese labour isn’t just cheaper to employ, it’s also better, according to Hart. “In China, there are no people who are too fat to work,” he claims. They “don’t storm off mid-shift, never to return to their job” and are “much less likely to physically attack each other and their manager”.
Nor do they disappear “on meth benders” or “fall asleep on a box mid-shift because their pay from yesterday got converted into pills”. Chinese workers can also “consistently and accurately multiply 7 times 9 and read in English” which, he claims, is beyond a large portion of the American workforce.
These issues are solvable, but not quickly. And certainly not by applying crippling and unpredictable tariffs to your existing supply chains.
What’s Trump actually trying to achieve?
According to The Washington Post, nobody really knows what Trump wants. Countries hit by the tariffs have struggled to understand what a ‘deal’ with the US to lift the tariffs might look like.
Doug Holtz-Eakin, president of the American Action Forum, a centre-right think tank, has been sceptical of Trump’s tariffs. “We have no idea what they want from other countries, and worse is that other countries don’t know what Trump wants from them,” Holtz-Eakin says. “I don’t know how you do negotiations in those circumstances”.
A test of competence, and the cost of getting it wrong
As the policy becomes mired in chaos, other countries are retaliating with tariffs on US goods. China has now imposed 125% tariffs, which will affect American farmers particularly badly. US agriculture is already suffering from chronic labour shortages, as undocumented immigrants are either being rounded up or in hiding, together with increased fertiliser costs and severe cuts in federal funding. The EU and Canada are also taking action.
The sector Trump aims to be helping, American manufacturing, is already beginning to see a fall in exports as overseas buyers react to the president’s latest announcements and foreign consumers boycott US goods.
Trump, who sold himself as the business genius – the only man able to solve America’s problems (“I alone can fix it”) – will be unable to distance himself from the problem. It will play into growing questions about his competence, as The Washington Post points out.
It is the wrong solution, applied to the wrong problem, implemented by the wrong people in the wrong way. Failure is guaranteed.
And when the tariff strategy fails, Trump fails.
