Some day, we might be able to talk about the economy without focusing on the tariff situation, but today is not that day. Instead, let's revisit the motivations behind the tariff struggle, as the priority ranking seems to shift daily. Then we should discuss the latest breaking news even as we know it will be changing almost hour by hour. By the time you read this, there will likely be somewhat less confusion, but these issues will be far from solved.

Recovery of U.S. manufacturing

From the beginning, there have been three justifications for the tariff policy. The first is an attempt to recover some of the manufacturing base the United States has lost over the last several decades. The manufacturing sector once accounted for almost 25% of the nation’s GDP (in the 1960s and 1970s), but that share has shrunk to just 10%. Imports played a major role in this decline, but it was not the only reason for all the job loss (some 20 million in the 1990s alone). Technology replaced a great many of those industrial jobs, as did outsourcing and imports. 

The thinking now is that restricting imports would allow for the industrial sector’s recovery. Restricting imports or making them more expensive will help, but many other adjustments would need to happen—­changes manufacturers have been asking for over the past several decades, including labor force expansion, infrastructure support, assistance in developing R&D, regulatory relief, tax relief and so on.

National security

The second motivation focuses on national security. The United States has become dangerously dependent on other nations for key supplies and resources. The vast majority of the chips used in our weapons systems are imported. Most of the time, these are supplied by U.S. allies, but not always. 

Of course, these chips also support the entire U.S. tech sector, and there have been efforts to stimulate their domestic production. It is not just chips; the United States is way behind in developing solar panels, electric vehicles, rare earth commodities and more. It is assumed that placing tariffs on products from other nations will encourage the expansion of U.S. production, but that process is complex and slow at best.

Negotiation

The third stated rationale for a tariff policy is that it provides room to negotiate. Trump has a reputation as a dealmaker, and the assumption is that he can use the tariff threat to get what he wants from other nations. For example, he threatened high tariffs on Mexico if it did not step up its efforts to halt the flow of illegal drugs across the border, and the 20% tariff on China is based on demands that China address the export of chemicals used in fentanyl production. 

The challenge with this motivation is that it is all based on who has the leverage. Sometimes that is the United States, and sometimes it isn’t. The United States is nearly always the demand side of this equation, and China is generally on the supply side. The United States needs and wants what China (and others) produces, but these nations need access to the U.S. consumer. The question is who needs who the most. 

Uncertainty reigns for now

To the U.S. business community, the most vexing part of the tariff situation is the constant fluctuation. A tariff threat is issued that would radically change the supply chain, and then a week or two or three later, it is rescinded. China was to be hit with a 145% tariff, and it was subsequently altered and lowered to 30%. The European Union faced a 50% tariff deadline on a Friday, but, by Monday, there was a month-long delay. 

These tariffs are ephemeral. They have all been created by a stroke of the presidential pen and can be undone the same way. No business decision can be made under these conditions, so the majority of companies have just gone into a period of stalling and delaying. This is especially true of those in construction, as they need to predict costs months and even years in advance. 

A bigger worry may be what happens when Trump leaves office. When Biden took over from Trump, he negated 40% of the executive orders Trump signed, and when Trump came back to power, he undid 40% of Biden’s. No company will invest in producing something if it could lose that competitive edge in a few years. 

At the end of May (when this piece was written), there was another very dramatic shift. The United States Court of International Trade (established by the Constitution) held that using the International Emergency Economic Powers Act of 1977 was not lawful or justified. This would negate all of the tariff decisions that Trump has made since the start of the year. 

This triggered immediate appeals and counter-appeals. Nobody has a sense of where this goes, but it is clear that legal wrangles will dominate for months. The practical reality is that businesses have no clear idea what to expect, and that supports paralysis and extremely short-term actions.

Nuthawut / stock.adobe.com