Reward Friends, Punish Enemies - Fat Tail Daily

Tariffs can be used in a variety of vain and foolish ways — to promote foreign policy goals, to influence other countries’ internal politics, to raise drug cartels’ profits, to pay off big donors.

We were probably wrong about tariffs.

Yes, of course, they were always a bad idea…and still are. Anything that interferes with our ability to freely trade with each other will make us poorer, with less choice and lower quality goods and services.

After the administration’s ‘reciprocal’ tariff bomb blew up in its face, in April, we thought tariffs would quietly go away, like a man who just made a fool of himself at a party. That’s about what happened with Canada during The Donald’s first term. His team squawked about ‘unfair’ trade with Canada and tore up the North American Free Trade Agreement, NAFTA. Then, after protracted negotiations, it ended up with something very close to NAFTA…and trade went on much as before.

We thought the negotiations with other countries would go the same way. But no. Even before the August 1 hikes, tariffs are at a 70-year high. And going higher. USA Today:

Trump said the U.S. will impose a 15% tariff on Japanese imports under the agreement, which he hailed as “a massive deal” in a July 22 post on Truth Social. Trump previously threatened a 24% tariff on Japan beginning Aug. 1, when higher tariffs for countries across the world are set to go into effect.

Bloomberg:

GM Profit Falls as Trump Tariffs Add $1.1 Billion in Costs

Bloomberg again:

US Companies, Consumers Are Paying for Trump’s Tariffs, Not Foreign Firms

Money Talks News:

Study Projects Trump Tariffs Will Cost Families $2,400 Annually

Yale University researchers project Trump’s comprehensive tariff strategy will increase costs for American families by $2,400 this year. The analysis examines price impacts across sectors from clothing to electronics as new trade policies take effect.

In other tariffic news, Trump just threatened to raise the rate against Canada to 35% and to raise the ‘universal’ baseline rate from 10% to 15% or 20%.

We saw last week how tariffs could be used in a variety of vain and foolish ways — to promote foreign policy goals, to influence other countries’ internal politics, to raise drug cartels’ profits, to pay off big political donors…and generally to make a mess of the economy.

They can also be used to enrich those who impose them. Money Talks News:

ProPublica Investigation Reveals Dozen Officials Traded Before Tariff-Driven Decline

ProPublica’s investigation reveals federal officials across multiple agencies sold stocks before Trump’s tariff announcements caused major market declines. The well-timed trades raise questions about government ethics and market transparency.

In theory, sales taxes are not especially bad. They penalize consumption, leaving capital free to accumulate. To the extent that they generate revenue and reduce the need for government borrowing — they also constrain federal debt.

But they are still a particularly sinister tax.

Taxes are supposed to be ‘fair,’ which is to say, you’re not supposed to tax a Republican more than a Democrat or a plumber more than a carpenter.

But tax loopholes and credits have been used for decades to reward friends, punish enemies…and drive the money where the feds want it to go. Want people to buy electric cars? Give them a tax subsidy. Want them to stop smoking? Impose a tax on cigarettes.

At least Congress — the peoples’ parliament — has a say in who is taxed and how.

Not so with tariffs. POTUS can tariff individual countries — giving different rates to different nations. He can also target individual industries…regions…and like the bills of attainder that the US constitution tried to avoid…he can single out specific products and individual companies.

NakedCapitalism: Washington just imposed a 17% tariff on US imports of tomatoes, almost all of which come from Mexico. As Bloomberg notes, the move comes just days after Trump unveiled plans to impose a 30% tariff, beginning Aug. 1, on many Mexican products that don’t fall under the USMCA agreement he negotiated in his first term.

Neither Democrats nor Republicans will want to give up this kind of arbitrary power. So, tariffs may become a more-or-less permanent part of America’s end-of-empire finances — a sneaky consumption tax, which gives the feds more money to spend…more opportunities for corruption…and another cudgel with which to beat anyone who stands in their way.

Europeans pay sales taxes of up to 27% (in Hungary). Life goes on. And if the Trump team ends up with an average 10% tariff/sales tax…it won’t be the end of the world.

But whatever fiscal benefit the feds get from higher tariff taxes — $300 billion is expected this year — is likely to be offset by lower GDP growth and lower tax receipts elsewhere.

And over time, shackled with tariffs, the US economy will become less competitive.

Regards,