Explaining Trump's Tariffs

Welcome once again to the Conversations That Matter podcast. I'm your host John Harris. And today we have a special guest with us. We have Daniel McCarthy from Modern Age Journal. You can go to modernagejournal .com if you want to find out more.

They are a conservative publication. They actually publish a lot of paleo conservative thinkers similar to Chronicles Magazine. I know I had Paul Gottfried on just a few days ago. So similar kind of, I guess, outlet.

But he is the editor and chief of that particular journal. And we're gonna talk about the Trump tariffs. I'm really looking forward to it. So with that, welcome. Should I say doctor or Mr. McCarthy?

I should have asked that.

Mr. McCarthy is fine, yes.

Okay, are you a doctor?

No, I'm not a doctor. And I don't play one on television either.

Okay, that's probably good considering in 2020 we lost faith in a lot of doctors, not just medical ones.

Quite so.

Well, I really wanna delve into this topic starting really from a personal level. And I think I probably represent a lot of conservatives and just your regular ordinary run-of-the-mill Christians out there.

We've been steeped in Reagan, the three tiers. I'm trying to remember what they were, right? Reagan's like three markets, one of them, I think social conservatives, another. I'm trying to think what the third one was, but his

National defense.

National defense, there you go, thank you. And the free market part, that sort of libertarian part, of course, I have attachments to that. I still want to see the free market function. I don't like it when the government regulates things, right?

And in 2016, when Trump was first running, he was proposing the wall and he was proposing tariffs. And he wanted to get us out of NAFTA, of course, but it was this, there was a lot of talk about regulating trade.

And of course, at that time I was against this. And I was listening to guys. I remember listening to like Ben Shapiro and guys who are more on the neoconservative side of things, perhaps, who are arguing against this, saying this wasn't conservative, this contradicted Reagan's tripartite there.

And I've since then realized maybe that's not quite true. Maybe actually there's merit to this. And so I'm hoping that you can help us, at the very least, understand, and maybe you have your own departures from Trump's plan, but maybe understand what the thinking is here and whether or not some tariffs are whether they're good for the United States and the economy.

So I think the first thing is, what is Trump proposing? What kinds of things is he hoping to accomplish through these tariff proposals?

Yeah, so Trump is proposing something really grand right now, which is basically a tariff on almost all foreign goods or all of them entirely. Now, Trump being Trump, this is probably an opening gambit as opposed to what he actually wants to accomplish in the end.

He is using the threat of tariffs, the possibility of tariffs, to get better deals in our trade arrangements with all sorts of other countries. And it may very well be the case. I mean, we'll see exactly what he does once he's in office.

It may be the case that he wants to impose these tariffs and then perhaps scale them back when he has a country that he wants to cut a deal with, or perhaps he doesn't even want to impose them unilaterally or universally to begin with, and is just using this idea as a threat, whether or not it actually gets imposed.

So that's one question is just how far Trump plans to go. But at least in terms of what he's talking about, it does seem like a universal tariff on pretty much everything coming in from the outside. Now, that would be a reversion to the kind of tax structure that America had for most of its history, that in fact, the tariff was the main source of the federal government's revenue until well into the 20th century.

Of course, the big question there is if you bring back a universal tariff like this, are you then going to get rid of the income tax? Are you gonna get rid of all of the new forms of taxation that were created basically to supply revenue for the federal government rather than having a tariff do that?

And historically, by the way, there is this trade-off between income taxes and tariffs. It's the same sort of thing in Britain where the abolition of the Corn Laws, which is a big sticking point between the conservatives and the liberals in the early part of the 19th century, the middle of the 19th century, that actually not only led to the abolition of the Corn Laws, which libertarians tend to support and are very happy about, and free market economists are very happy about, but it also led to the creation of the income tax.

And so if you have a very critical view of taxes and you think taxes are evil and destructive, which most libertarians also believe, you really have to ask yourself, is this a good trade-off? Is it better to have income taxes as opposed to having tariffs?

Now, Trump hasn't, well, he has talked actually a little bit about abolishing the income tax, abolishing a whole slew of other taxes that are established, but to do a lot of that, he would really have to get these proposals through Congress.

Even with Republican control of both the House and the Senate, being able to reform taxes on that scale would be an enormous undertaking, and it's probably more than his political cards will allow him to accomplish.

On the other hand, funnily enough and ironically enough, Congress has ceded so much trade power to the executive branch over the past 30 years, basically from Reagan onwards, that in fact, the president can now impose tariffs pretty much unilaterally.

And so Congress, and especially while it's a Republican Congress, they're not likely to revoke that power, but it does seem to be that if Trump does this and if it backfires, then you're going to get this become a massive issue in the 2026 midterms, which might very well play to the Democrats and then the Democrats would use Congress to revoke the tariff power that the president has been granted.

So that's the state of play. What Trump is trying to accomplish here, he fundamentally thinks that America has been ripped off by the rest of the world for a very long time. That's true in foreign policy.

It's true with our so-called allies who are in fact, clients who are dependent upon us for their national defense. It's also true in Trump's view where trade is concerned, and that China in particular has been able to rise at the expense of America's middle-class, which was heavily invested in manufacturing for most of the 20th century.

So Trump wants to undo that. He wants to make sure that other countries all feel that they have to, in a sense, pay tribute to the United States and tariffs are going to be the way to do that. Meanwhile, American manufacturers will be more protected by these tariff barriers, and therefore will have more of an opportunity to cultivate the American market for themselves.

One of the free market concerns here, and it's a complicated one, is, well, I guess there's two ways of looking at this. One is there are free market supporters who say that unilateral free trade is great, even if other countries are actually cheating.

So you can imagine that two companies are competing to manufacture widgets. One company is in your country, another company is in the other country, and this other country might actually be subsidizing its widget production or doing other things in order to make its products more easily available in your country than your products are available in their country.

Now, if this kind of strategy is employed, what's going to happen is that you'll probably have widget manufacturing move to the country that is subsidizing it, the country that's using unfair practices to promote it, and you're going to have your own native widget manufacturing decline and collapse.

There is a sort of pure free market argument which says even that kind of cheating is okay in the long run because it will ultimately only damage the country that's responsible for that cheating, the country that's subsidizing its industries.

That'll be dis-economical in the long run, and then that industry will eventually collapse, and then in the meantime, the country that is not subsidizing its products but is getting sort of cheap imports that are artificially subsidized by its opponent, that country will be receiving cheap consumer goods, which is a nice thing, and meanwhile, it will have other industries it can focus on besides the one that the other country is subsidizing.

So that's one argument, but I think a more realistic view says that actually having industries in your country destroyed because other countries are using unfair competition, and that can take many, many forms.

Subsidies will be kind of the clearest example, but you can also have currency devaluation. You can also have sort of regulatory arbitrage. There's all kinds of things that can lead to basically government-imposed differences in the costs of products or manufacturing products in two different places or in multiple different places.

So Trump, I think, is trying to basically say the United States is not going to be taken advantage of by anyone else's trade policy. Everyone who wants to do business with us is going to have to pay a tariff to bring their goods here, and then America will decide what kind of grounds upon which we want to negotiate, whether it's with China or with Mexico or with the European Union or anyone else.

If a country is engaging in some kind of unfair tactic to lower the price of a good or service that's coming here, aren't they hurting themselves in another... They have to take from... In the example you gave, if they're subsidizing, they have to take from somewhere to subsidize, right?

So they're either taxing their people or they're... I mean, they're taking it from another industry. So I guess the question is, aren't they already hurting themselves to accomplish this? And if that's true, I mean, they're hurting some of our industry too, but to put a tariff on it, wouldn't that make matters worse by passing on to the consumer essentially a...

I mean, I don't know if you consider tariffs taxes, but a higher price for these goods?

Tariffs are definitely taxes. Now, you're right that a country that is subsidizing or otherwise using legal power or the power of its centralized state in order to give itself a trade advantage is doing harm to some of its citizens, at least, because it's certainly taxing them or otherwise expropriating those funds in order to subsidize industry or otherwise give its industries an advantage.

The question though is why do countries do this? Why do the Chinese, for example, do this? Why did the Japanese do it? The Germans do it.

Why is it?

And in fact, almost all countries have done this historically. And it's because they see long-term value in the acquisition of industrial strength in their own country. So the idea is that if you subsidize manufacturing in your country, you're able to flood the market of a competitor.

That competitor may have more advanced industry than you at first, but because these advanced but rather expensive finished goods are now competing with subsidized finished goods from the competitor country, that will tend to make consumers go to the cheaper goods that are subsidized.

That will tend to wipe out the market for the more expensive goods that are sort of fairly produced. And that will mean that you have a collapse of those industries in the country that's not subsidizing and the growth of those industries in the country that is subsidizing.

Now, economists like to say that the governments that do this can't second guess the market and that by building up, artificially building up the industry in their own countries, they're actually creating a problem for themselves in the long-term because of course, consumer preferences might shift because the cost of manufacturing in their own countries might go up.

All sorts of things could lead to that being a diseconomical choice to subsidize production in your own country. But why do so many countries do it? Well, it's because some of them do it because they want to maintain their industrial workforce, which is basically a political reason.

They want the workers in their country to be happy. A lot of countries, however, and in fact, this is historically one of the biggest reasons, a lot of countries want to get a military advantage, a strategic advantage from having certain kinds of manufacturing in their countries.

This certainly applies to things like shipbuilding. It applies to aircraft building. It's why a company like Boeing, for example, is so heavily regulated and subsidized and is something less than a fully free market entity here in America.

That's true of aircraft manufacturers all around the world, at least the larger ones. It's certainly very true of ship manufacturing. And then it's a true, of course, of the things that go into the inputs for shipbuilding and aircraft.

So that includes everything from steel to computer chips. So you can actually wind up with strategic and military advantages being pursued by countries leading them into very extensive kinds of industrial policy.

And it's interesting because a lot of libertarians and free market economists will say at least notionally that they are willing to make exceptions for critical defense industries to be protected. But in practice, almost anything, I shouldn't say almost anything, but many, many things can be construed and with good reason as being, in fact, critical to defense.

So Japan, for example, has highly protected agricultural markets. They strongly protect, for example, the growing of rice in Japan. Now that's not a critical military technology in the sense of, you know, that they're going to throw, you know, rice patties at, you know, balls of, you know,.

Sort of dried rice.

Yeah, they're not shooting rice at us.

Exactly.

They're not shooting your rice cannons like potato guns or anything. But they say basically, if Japan is going to succeed in a very competitive world, we have to be able to feed ourselves. And so we actually do have to maintain this native agricultural production capacity.

By the way, this is a very serious strategic concern right now with Taiwan, because Taiwan does not have the capacity to feed itself. And basically all China would have to do in order to conquer Taiwan, they wouldn't have to invade necessarily.

All they would have to do.

Is blockade it long enough and, you know, thoroughly enough that Taiwan winds up running out of food. So, you know, this is an element of the game play that these states are involved in when it comes to their tariffs.

Now, you know, there is also an argument to be made and that, you know, while it's true that states cannot consistently second guess the market, states are just, you know, human beings the same way that firms are.

And it doesn't bother free market economists that companies also make bad investments, that companies also go bankrupt. Companies also adopt, you know, strategies that wind up not working. The difference is, of course, a state, because it's able to externalize its costs, it's able to tax its citizens to pay for its own mistakes.

States can invest, you know, much more resources in very bad strategies. But at the same time, there are, you know, free market firms which make the right choices and which actually do succeed. Most new startup companies, most entrepreneurs don't succeed, but the few that do create an enormous amount of value.

And the fact is states sometimes also get lucky or are able to be strategic enough that they actually do succeed in picking the winners or losers. It's not a common thing, but it can happen. And when you combine that with the strategic, you know, military concerns here, you can see why states often engage in this.

So the way this would go is, you know, China's bet is that in the long run, manufacturing is going to be more important than finance. And so while the United States has all these, you know, sort of finance companies, we sell insurance, we have all kinds of capital markets, which makes us very wealthy and powerful right now.

The Chinese say, but you know what, when the dollar is obliterated, what are the Americans going to have? What's all this financial infrastructure going to be worth? We in China, on the other hand, if we have the manufacturing base, people are always going to need manufactured goods, whether those are televisions or tanks.

Wow, there's a lot to go into there, depending on what direction we want to go. That's really good explanation. What about the economic side of this? Because I understand the military side and I'm sure there's, I was even thinking, I don't think you said this, but of, you know, new technologies.

If you can corner the market on certain new technologies and sacrifice one area of your economy to, I don't know, create iPhones or something, then you're on the cutting edge and you can dominate so much.

So, I mean, I see that strategic end, but what about the economic, like just the well-being of the GDP, the happiness consumer index for the country and the people who live here? Because Trump seems to be promoting tariffs as a way to get rich.

Now, maybe I'm wrong on that. I was just watching him on Rogan though, and he was saying it's the most beautiful word in the English language. And he just seems to think this is going to be like magic dust and Americans are going to have prosperity because of these tariffs.

But as you said, it's a tax. So how does this work or does this work? Is he mistaken?

Well, in the, you know, in the 19th century, America, as I said, used tariffs to finance the federal government. And this was, of course, also a golden age for American economic growth, development and industrialization.

So when Trump makes the argument that tariffs are going to make America rich again, he's basically looking back to a 19th century model that he thinks was very successful. And, you know, there are, there are, you know, sort of trade historians who argue about these questions, but there are a case, there is a case to be made that this is a path that other countries have followed as well, that Japan and Germany after World War II followed a similar strategy,.

Not necessarily.

Just employing tariffs, but certainly using an industrial policy to bring more industry to their countries and to use that to create a new middle class. If you look at, I mean, it's really remarkable.

America is, you know, a kind of, you know, it's very politically incorrect to say this, but it was a very low, low population density land mass of land that had not been developed very much, right? It was not a land of factories in the early 19th century.

It was not a land of cultivated fields. It was still largely virgin territory. The economic situation of Japan and Germany after World War II was absolute devastation. Their industries have been destroyed.

You know, their populations, especially in Germany, were very nearly starving. This was, you know, as low as a country can get economically. By the way, you can also look at something like South Korea, which was also extremely poor, partly as a result of wars, partly as a result simply of having never really developed heavy industry.

Well, all of these countries, Japan and Germany and South Korea after World War II, and of course, America in the 19th century, they all adopt this developmental mindset using industrial policy in the case of America, using tariffs very broadly.

And they become industrial superpowers over the course of just a few decades. And in fact, you know, in some cases even faster than that. So this is what Trump is pointing to when he says that tariffs are going to make America rich.

He thinks that, you know, it's going to create a new golden age for American industry. That's going to be great for employment. It's actually going to be good for consumer markets as well. That's what Trump is envisioning.

Now, yes, tariffs are a tax. And one of the arguments that has to be sort of sorted out is what they are a tax on. So you see, one of the anti-tariff arguments that's being made by a number of thinkers is that tariffs are a tax on American consumers.

They're a tax on whoever buys the product. And what you said earlier is what they argue. They say that the price of the tax is passed on to the consumer. And if the consumer is an American, that means the Americans are the ones paying the tax.

The problem with that view is that prices are not simply arbitrarily set based on the input costs of a good, right? So think about this. A company can make a product and it may cost, let's say, a dollar for labor, $2 for raw materials.

So it comes to $3 for production costs. And then they want to give it a certain amount of profit. So they charge $4 for this product on the market. But there's no guarantee that just because the company, it costs $3 or $4 to make this good, that therefore consumers are willing to pay it because consumers have, in a mature economy like the United States, they've got an infinite number of choices of things they can buy.

So they can decide, hey, I don't want to buy widgets or I don't want to buy televisions. Those are expensive. I want to buy computers instead or I want to buy books instead. They have any number of substitute goods that they can choose instead of things that they don't like.

So companies that produce any kind of good have to serve the consumer. They have to meet the consumer's demand rather than arbitrarily making prices based on price inputs.

Now, obviously,.

If it costs $3 or $4 to create a product and yet a company finds that market demand, consumer demand is only willing to pay $2 .50 for that product, then ultimately, one of two things is going to happen.

If the company keeps making that product at a cost of $4 and selling it for $2 .50, they're going to go out of business. So that's one thing. But there's also the possibility that a company which gets started with this and then starts capturing a large enough market will find that, in fact, it can develop economies of scale, which may allow that sort of $3 or $4 production cost to be brought down closer to $2 .50.

It also may find that in the process of creating these goods over and over again, that it becomes more adept and more skilled at creating them and is able, therefore, to lower the production costs so that it develops better technology over the course of supporting this market.

And this is what we actually see in free market processes in America. It's often the case that new companies have products that are dis-economical. Think about something like a retailer like Amazon .com.

Amazon .com was unprofitable for about 10 years. It survived on, basically, investment money. Now, how is it able to survive despite being unprofitable? And this is true for a retailer like Amazon, but it could be true for a manufacturer of widgets or anything else.

It's because the investors said, wait a minute, when Amazon gets good enough that it's able to fulfill these orders with less cost, when it has developed a wide enough market, when enough consumers are accustomed to buying this product, then it's going to be in a position where it actually will start to be profitable because costs will come down and consumers may be willing to buy more and more volume.

And as the costs come down and volume goes up, you may reach a point where there's a slight profit, which then, because of the very large volume Amazon has developed, will become a very large profit. So actual market processes are a bit more complicated than just the idea that whatever it costs to manufacture something is what the price should be.

And that's a big elementary mistake, which I think some economists who know better promote that mistake because they think it makes for an easy case against tariffs, because when you're adding a tax to something, that's making it more expensive.

Therefore, manufacturers aren't going to pass on the cost to consumers. If manufacturers raise the cost of a product, which is currently selling for say $4, they raise it to $5, they're obviously going to lose consumers because the number of people who are willing and able to pay $4 for a television set or whatever else, obviously that would be a really good deal, but whatever they're buying for $4, you don't have the same number of people who are willing and both willingness and ability are important here.

We're both willing and able to buy the same product for $5. It's just not the case that consumers have infinite piles of money and that you can just get more money from them by arbitrarily charging more for the goods.

What actually happens, who really pays the tariff here? It's not the American consumer because the American consumer has, first of all, a variety of substitute goods they can turn to. That's obviously, first of all, domestic equivalents of the foreign produced goods.

And we can argue or discuss how it is that domestic producers really aren't able to raise their prices much or perhaps at all simply because you're losing foreign competition. That would only be true if you wound up with a monopoly kind of situation as a result of taking foreign competitors out.

So there is that special case. But otherwise, basically, if domestic producers are able to get more market share because they no longer have to compete so much with foreign producers, what that's going to do is it will send a signal to other companies which could get into the widget manufacturing business and say, aha, there's actually space in this market for more competition.

This was a competitive space previously occupied by the foreign firms. Now it's an opportunity for domestic companies to come in and make more money. I think the more accurate analysis of where tariffs have an effect, which might be harmful to an economy, the more accurate analysis is not that consumers wind up paying more.

It's rather in two different directions. Tariffs wind up ultimately being a tax on capital. So what, you know, and I recently, you know, kind of made an argument to an economist friend of mine saying, you know, it's well known in economics that you get less of whatever it is you tax.

A tariff is not just a tax on goods. If it was a tax on goods overall, yes, you'd get fewer goods.

And that would be a big problem.

Instead, it's a tax on foreign goods. And it's really particularly that foreign element, which is getting taxed. So it's actually foreignness itself, which is getting taxed by a tariff. And it's really foreign capital that's ultimately getting taxed because obviously if, you know, again, if it costs, you know, three or four dollars to manufacture a widget based on input costs, and then, you know, another country puts a tariff on the product you're selling, and that adds another dollar.

To the cost,.

You have two choices. You can either raise the cost to five or six dollars,.

In which case you're going.

To have fewer consumers and you may actually lose market share and you're going to be, you know, in serious trouble in terms of competitors. Or your other alternative is you can take that, you know, additional dollar of cost out of your profitability, out of your capital.

And if you do that, that means you have less capital not only to reward investors, but also less capital with which to invest in new manufacturing and so forth. So it's very, so a tariff ultimately winds up damaging foreign capital, which is actually part of what, you know, tariff supporters want to see happen.

What tariffs do to the domestic market is they encourage a shift in capital allocation, basically a shift from areas that do not have protection into areas that have more protection. So in other words, when you have foreign competitors removed from the market, if you have, you know, just one or two firms that are domestic, that are making widgets, now there's an opportunity for additional firms to come in and make some profit in the space that was occupied by those foreign firms previously.

But if that happens, what that means is that people who could have been putting their capital to use, making things other than widgets, now see widgets as being a good market to get into and are more likely to invest in that.

This too is something that supporters of tariffs actually see as a good thing because it means that you're going to have more capital allocated to American manufacturing. And they think, and I think there are good reasons for this.

They believe, I believe in fact, that right now our capital markets are distorted by the fact we have very strong intellectual property protections in this country and very strong international IP protections that we enforce, but we don't have similar protections for actual manufacturing and hard industry.

And what that has done over time is to shift American capital allocation away from real world manufacturing into the realm of IP. And that has certain problems because IP itself is, of course, a kind of property that is purely created by state fiat.

Intellectual property is a matter of governments saying, we give you an intellectual monopoly on this particular idea. And while there are good cases that can be made for that, it is a distortion of market processes in itself.

So I actually see Trump's tariffs as a way of balancing one kind of thumb on the scale from government by putting another thumb on the scale. Now, pure free market economists would say that's bad. You should take both thumbs off the scale, get rid of the intellectual property protections and also get rid of manufacturing or tariff protections.

But if you can't do that, if you're going to have a very unbalanced system right now that favors finance and favors IP,.

Then it seems to me.

You've got to do something to strengthen capital allocation to manufacturing because otherwise you'll see exactly what we've seen over the last 30 years, which is American manufacturing will lose capital and therefore will continue to disappear and die.

And then America will be in big trouble when it turns out that you have something like the COVID crisis.

Or a big war.

Where we can't get all the goods from China or from India that we're accustomed to getting.

What is the trade off as far? So let's say there's a factory in Mexico and they're producing air conditioners. I think there was an example of that a few years ago. Actually, I think it was Trump's first term and he had told them, don't go to Mexico.

Before he even took office, he was saying, I'm going to put tariffs on imported goods. You want to stay here? And then they stayed in wherever it was, Chicago. I can't remember. And so there's this company that's going to do this and they can sell to the consumer at a cheaper price if they invest in a foreign market.

But of course, now that they have to pay a penalty if they're going to do that, they have to invest in the salaries of American workers and not just that, the infrastructure that goes along with that in the United States.

I guess the question is, is the trade off worth it? Is that going to bring so much revenue and investment back into United States manufacturing that it makes up for the fact that consumers would, if they chose to purchase the product, be paying a higher price?

Well, like I said, I think

Well, and if I could add one tag on that.

Sure.

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Right. So the pro tariff case says that, in fact, consumers will not, in the long run, at least, and assuming that, you know, you actually have competitive domestic markets, which is a key element. But if you have competitive domestic markets and you have, you know, take enough time into consideration, and it's not a lot of time, but, you know, I'll maybe talk about the time issues in a moment here.

But ultimately, consumers will not be paying more in the long run, because, you know, in the modern 21st century, almost anything that can be manufactured in one place can also be manufactured in another.

And, you know, the cost will not necessarily be much different. The main things that create differences in cost structures are things like regulations. And that's, you know, an issue where Americans do have to be concerned because we do have higher regulations than other countries have.

On the other hand, Americans tend to support these regulations, whether environmental, or labor, or otherwise. So, you know, there is a sense in which if Americans, you know, we're being, you know, called on our own hypocrisy, right?

Because here in America,.

We say, well,.

We have to have clean air, we have to have clean water, we have to have, you know, you know, protections for labor in terms of how many hours they're working and not having child labor and everything.

So Americans, you know, want to feel good about having these regulations. But they all, but Americans also want to have cheap products that are made in other countries that don't have these regulations, where, you know, factories can pollute streams and can, you know, shoot acid up into clouds and whatnot.

And you may have, you know, slave labor or child labor in, you know, parts of East Asia. So the price of, you know, having to confront, you know, the question, do you want these regulations or do you not want them?

And if you do want them, you know, you have to pay the price for them. That's one thing that, you know, yes, Americans will have to make, you know, both an economic and a political choice. And ultimately those two things.

Will combine.

So I think actually what that does is, you know, it puts pressure on Washington, D .C. and on the states themselves to get a lot smarter about regulation because Americans will be, you know, shocked to see, you know, if regulations are now causing prices to increase, not because, you know, you don't have as much foreign competition, but rather because our regulatory structure, once you actually, you know, take into account the full cost, winds up being something that's very burdensome.