Playing Tariff Chicken

The fun of gambling with the economic outcomes of other people...

Gone are the certainties of the past, when rivalry and conflict relied on a distinction between the states of war and peace. Conflict in our time starts from the fact of deep integration. The different sides are so deeply connected through political, economic and technical links that no clear borders can be drawn and everyone is, in a way, present inside the enemy camp, and will try to weaken their forces from within. The image of conflict is no longer that of battling warriors but of species competing for the same ecosystem, struggling forces which are at the same time part of a single system.

That is what Bruno Macaes wrote in his paradigm shifting 2018 book The Dawn of Eurasia: On the Trail of the New World Order. Four years later I asked him if Russia’s invasion of Ukraine represented a flaw in his model. He said no. On the contrary, it was proof that the model was correct. Russia always saw Ukraine as a key to regional influence over trade and supply chains. And so it was not surprising that Russia would pursue Russian interests with respect to competing with the West for control of one of the former Soviet Union’s biggest prizes. The surprise was not the motivation or the direction Putin moved, but instead the willingness to treat the value of human life so cheaply as to resort to levels of violence not seen since the first half of the 20th century in Europe. A troubling trend, but not counter to base motivations.

I have some version of the same question regarding President Trump’s latest “liberation” tariff policy; the administration’s attempt to shift US trade relations in a more protectionist and nationalist direction. Stemming from his long held view that existing global trade deals were unfair, President Trump imposed tariffs on a range of imported goods, most notably steel and aluminum. The aim was to protect US manufacturers, reduce the trade deficit, and revive domestic industries.

China was the primary target. The administration argued that Beijing was pursuing unfair tactics to acquire advanced technology and intellectual property, including forced technology transfers and state subsidies. By imposing tariffs on a broad array of Chinese imports, the White House aimed to press Beijing to reform these practices and abandon what it viewed as protectionist industrial policies. The US tariffs have tanked the stock market and drawn near uniform criticism from economists. I don’t expect the current administration to care too much about either. But I do expect that longer term economic consequences that we appear to be heading towards on the current course will eventually pull the rug out from under the plan…or the President’s seemingly intractable grip on the Republican Party.

The reality is that any major shift back towards industrialization is a decades long play. Whatever happens in the long term, a reduced level of investment in US businesses will impact the American people more than anything else tangible in the short term. And ignoring a real life recession conjured out of the ether by trade policy is hard to do. It was once true that a hallmark of the Trump political platform was to stimulate domestic investment through low taxes and deregulation. Tariffs are the near polar opposite.

The economists are right. The math does not work. Moreover, it’s not clear why tariffs would be applied for the purposes of bringing back manufacturing to America. Only 15 percent of the employment impacts on US manufacturing are attributable to trade policy. The other 85 percent was due to differences in productivity growth…or said differently, we cannot make things as once relatively efficient in America because of improved productivity and technology in lower cost labor markets and automation in ours. Which is not really mysterious, as Dave Chappelle points out.

Macaes closed the loop on my original question with a post on X yesterday.

With the tariffs the US is destroying the two things it most needs to reindustrialize: access to supply chains and capital goods, and access to large markets.

It’s clear Trump and Putin are playing the same game. And so is China. So we should not be surprised that an administration is trying to put America first in a global economic high stakes competition. What we should be surprised, and the markets tell us we clearly are, is that America is going to try to win by imposing tariffs; a strategy that fundamentally abandons our strength and creates a game of economic chicken that the richest country in the world should never play. It may be the right game. But it’s the wrong play call. For the “this is 4D chess and you just don’t get it” club, I’m happy to be wrong. But someone is going to have to point out at least one of the unseen dimensions. The fun game of “only the sentient leader truly knows” is a serious Maoist vibe.

There is a nonzero chance that there is no intention at all to impose tariffs (2.5D chess?). That this is the Trumpian process of negotiating only after throwing the first punch to ensure anyone coming to the table is already seeing stars. We will know soon enough when we start to see any new trade terms being touted as a victory delivered from a position of strength.

If that’s the case, we’ll gain some potential advantages in trade terms. Manufacturing will not come back at the levels it was 100 years ago. And we’ll be in no material stronger position in global trade at the cost of the sort of uncertainty that dissuades domestic investment. It’s really hard to imagine that the actual plan here is long term tariffs. But I am 0 for everything when it comes to predicting anything in Trump part II. So buckle up.