Beneath the Surface
Trump Tariffs: Why It’s The Right Time
February 10, 2025 • 9 minute, 2 second read
“Economic depression cannot be cured by legislative action or executive pronouncement. Economic wounds must be healed by the action of the cells of the economic body – the producers and consumers themselves.”
—Herbert Hoover
February 10, 2025— We admit that we’re fans of free markets here at the Grey Swan Investment Fraternity.
The decisions of billions of global consumers do a better job of coordinating goods and services than the dictates of a few thousand bureaucrats globally.
So we don’t like tariffs. It seems like a relic from a simpler time, when America was what we would today call a “developing” nation. When internal industries needed some kind of support so they could be built up and stand amid giant industries out of Germany and the United Kingdom.
In modern times, the idea just doesn’t seem to make sense.
Plus, tariffs simply put a middleman (or two) between two consumers, simply because they live on the other side of a border. That would seem to needlessly drive up costs.
But, it’s also true, as Donald Trump claims, that the federal government once ran almost entirely off of tariff revenues. To do so today would require taking an Argentina-sized “chainsaw” approach to slashing government. As we’ve seen with DOGE and USAID, such an approach is underway.
While we’re not a fan of tariffs economically, we can potentially see their value, as Trump does, as a political and diplomatic tool. But, again, we prefer to see other measures before the announcement of blanket tariffs, as it creates uncertainty in financial markets.
Today, it’s our pleasure to share with you Jim’s thoughts on why Trump’s tariffs make sense now. These thoughts come straight from the pages of his subscribers-only Strategic Intelligence February issue, courtesy of our publishing friends over at Jim’s shop, Paradigm Press.
Take a close read of today’s essay by Jim, and let us know your thoughts… especially if Jim changes your mind on tariffs.
Remember, we personally worked with Jim a decade ago to get his Currency War trading strategy off the ground. In last week’s event, Jim warned of a treacherous development he expected would ignite the final phase of the currency war. Rickards reveals significant developments he is confident will begin on Monday. For details, click here. Enjoy. ~ Addison
Trump Tariffs: Why It’s The Right Time
Jim Rickards, Daily Reckoning
As I studied the 2024 election season, I continually assessed Trump’s chances of winning. (We got that right, predicting exactly 312 electoral votes for Trump, the best forecast in the business and the only one that said Trump would win seven-out-of-seven swing states).
But I also asked myself whether Trump had learned anything from his first term. Would he have better appointments? Would he move quickly? Would he crush the resistance and destroy the deep state?
We now have the answer, and it’s a resounding Yes! Trump’s appointments in over 50 key White House and Cabinet-level appointments are uniformly talented and loyal to MAGA. They are quickly being confirmed. Trump’s blizzard of EOs and other orders are revolutionary in the best sense of the word. Illegal aliens with criminal records and terrorist connections are being rounded up by the hundreds (with thousands more soon) and deported or put into detention camps.
The Case for Tariffs
For now, we’ll focus on one particular facet of Trump’s new policies – tariffs. Trump has made repeated statements about tariffs he plans to impose on China, Canada, Mexico, the EU and members of the BRICS. These announcements are not entirely consistent. Some statements mention 10% tariffs, others recite 25% tariffs on the same targets. The reasons for tariffs also vary from fentanyl, lack of border controls, unfair trade practices, theft of intellectual property or simply protecting U.S. firms and attracting new investment into the United States.
Some tariffs can be done by presidential order. Others may require legislation. Some may require renegotiation of treaties. Others may simply override treaties or be implemented on a bilateral basis.
It All Depends on Conditions
Before we can look at specific applications of tariffs, it’s critical to address a higher-level question. Are tariffs good or bad policy? If tariffs are bad policy in the sense of destroying wealth and economic growth, then there’s not much more to discuss. Likewise, if tariffs are good policy that expand the economic pie, then we should be looking for ways to apply them. Which is it?
The answer is that it depends on the initial conditions. There are certain economic conditions where tariffs might be exactly the wrong policy and will do material damage. There are other conditions where tariffs are the right policy for generating high-paying jobs, investment and economic growth. Therefore, the decision to impose tariffs or not depends on understanding which conditions are conducive to tariff-enhanced growth and properly analyzing the economy. Mainstream economists do a poor job at both, which explains their reflexive opposition to all tariffs at all times.
There is no right choice between outsized trade deficits and trade surpluses. Both are bad for global growth but in different ways. The last time the U.S. had a trade surplus was 1975, not long after Nixon ended the convertibility of dollars for gold.
Some of the largest trade surpluses (measured as a percentage of GDP) occurred from 1914 – 1919 (due to World War I) and 1942 – 1946 (due to World War II). In both cases, the world turned to the U.S. for exports of clothing, weapons, food and other necessities to fight the wars.
Trade surpluses eroded during the 1950s and 1960s when the world needed the U.S. to “export dollars” by buying more imported goods, especially from Germany and Japan to support the rebuilding of those economies. (Think of transistor radios from Japan and Volkswagens from Germany as the leading edge of both countries becoming export superpowers).
Today’s Conditions Favor Tariffs
Conditions in the U.S. today are the reverse of those in 1930. Today the U.S. consumes more than it produces. This is the environment where tariffs produce the most benefit.
The U.S. needs to encourage investment, productivity and increased output. Those elements will help U.S. GDP more than increased consumption. In fact, those elements are not in competition. Growth is not a zero sum game among components. It’s entirely possible to have increased production and increased consumption at the same time. The purpose of tariffs is to increase production faster than consumption. Both can benefit while moving closer to balanced trade or even a condition of P > C. It’s not the case that consumption suffers. It is the case that production gains more.
There are many other benefits from tariffs. Foreign producers can still sell as much as they want to U.S. consumers. But to do so, they will have to manufacture their products in the United States. This means increased investment in the U.S. as foreign producers either build new plant and buy equipment here or acquire U.S. companies at prices that help the stock market. In turn, that expanded plant in the U.S. increases high-paying jobs for Americans. (This trend to high-paying American jobs will be amplified by Trump’s deportation of illegal immigrants who tend to drag down the wage structure across the board).
The increase in investment in the U.S. also accelerates the U.S. lead in high technology including semiconductors, artificial intelligence, nanotechnology and quantum computing. China has kept pace in these fields by stealing intellectual property and providing massive government support. Now, the U.S. can pull away from China by importing some of that technology and relying on private investment along with government support.
Contemporary critics of tariffs (basically all mainstream economists) claim that these tariffs will invite retaliation by trading partners and may cause a replay of the collapse of world trade that did occur in the 1930s.
This flawed analysis ignores the initial conditions qualifications described above. China is in the opposite position of the U.S. It produces too much and does not consume enough. China’s best approach would be to lower its tariffs, encourage consumption by its citizens and attempt to strengthen its currency so that its consumers can afford more imported goods. In fact, we expect China to do the opposite and hunker down in its neo-mercantilist approach by cheapening its currency and attempting to flood the world with more exports.
If U.S. policy is to Make American Great Again. That means high tariffs, lower taxes, more productive investment (including public investment) and high-paying jobs that will support consumption side-by-side with increased investment.
Tariffs Will Benefit the MAGA Wave
Trump’s tariff proposals have a broader set of objectives than the macroeconomic goals of higher output, more jobs and higher wages. He will also use tariffs to impose costs on countries such as Canada and Mexico that are not enforcing border restrictions and not doing enough to slow the flow of fentanyl into the U.S. Trump has also threatened to impose tariffs on NATO members who do not pay their agreed share of combined defense costs.
Tariffs should also be distinguished from financial sanctions and other forms of financial warfare. Tariffs are a legitimate policy tool with beneficial effects as described above. But they can also be used as a weapon in financial war. Trump has threatened Russia with more tariffs and embargoes on its energy exports if they do not agree to end the war in Ukraine quickly. Russia is likely to ignore these threats. Numerous rounds of tariffs, seizures and embargoes since the war began in 2022 have failed to deter Russia. The point is that financial warfare tariffs should be treated separately from economic policy tariffs in weighing costs and benefits.
The tariff and trade wars and ancillary currency wars will continue along the lines described above. As always, in economic contests there will be winners and losers. Right now, the U.S. is poised to be the big winner as U.S. companies benefit and America First policy begins. That’s good news for markets and investors looking to ride the MAGA wave. ~ Jim Rickards, Daily Reckoning
Regards,
Addison Wiggin,
Grey Swan
P.S. If you missed it, you can still catch Jim’s latest briefing from Pentagon City , just click on this link.
Remember, we personally worked with Jim a decade ago to get his Currency War trading strategy off the ground. In last week’s event, Jim warned of a treacherous development he expected would ignite the final phase of the currency war, including the imposition of tariffs from China that kick off today. For details, click here.
Please send any comments you have to addison@greyswanfraternity.com
