Liberation Day: Explaining Trump’s Tariffs

Liberation Day. President Trump just announced tariffs of up to 49 percent on imports, with a minimum tariff of 10 percent on all goods from other countries. While their effects could be harmful to long-term U.S. interests, especially its overriding goal of preventing China from surpassing the West in techno-economic power, one immediate question is: What is he thinking? Or, more specifically, how do Trump and his team view trade and globalization?

This is a complex question, but to answer in the simplest terms possible, the administration views trade deficits in goods as bad and trade surpluses in goods as beneficial. To them, the only reason for U.S. trade deficits is that other nations are "cheating." As Trump put it, "For decades, our country has been looted, pillaged, raped and plundered by nations near and far, both friend and foe alike."

Why Tariffs?

Okay, so why tariffs instead of more proactive industrial policy measures? That's easy: Trump is fundamentally a small-government protectionist. He wants to radically shrink the size of government-including, or perhaps especially, industrial policy measures like the CHIPS Act. In this regard, he is a traditional small-government Republican in the model of Newt Gingrich, Paul Ryan, and Grover Norquist, aiming to roll back the federal government to its pre-New Deal size.

While that explains why he opposes industrial policy, why tariffs? The answer lies in the kinds of businesses Trump favors. Traditionally, Republicans were seen as the party of business and Democrats as the party of workers, reflecting Marx's duality of only two classes: capitalists and workers. But in reality, there are many kinds of capitalists.

Mao understood this when, after his 1949 takeover of China, he decried the "bureaucratic capitalists " (large companies, especially those doing business across borders) while praising national capitalists. He claimed, "We should rally the petty bourgeoisie and the national bourgeoisie under the leadership of the working class." That sentiment largely sums up Trump's trade policy, which favors small businesses and U.S. companies that produce and sell domestically.

As such, in the Trumpian trade world, there is deep disdain for "disloyal multinationals"-or, as his former advisor Steve Bannon called them, "the globalists." They see multinational corporations, especially those that moved operations to China, as having sold out America in pursuit of profits. In 2016, I attended a D.C. conference that turned out to be dominated by mostly Trumpian trade policy types (former U.S. Trade Representative Bob Lighthizer was a speaker). I asked a panel why the U.S. government should not take steps to protect American companies doing business in China from CCP attacks. Their answer: They chose to do business with China, so screw 'em.

Beyond that, many Trumpians disdain multinationals, particularly publicly traded ones, for prioritizing short-term profits over American interests. Their disdain only deepens when you add the fact that many of them see multinational corporate America as caving to the "woke mob" and embracing DEI initiatives. As Trump supporter and former senator and attorney general Jeff Sessions wrote, "The globalists were like the Lilliputians, using their many strings to bind the giant Gulliver (e.g., the United States)."

In contrast, the Trumpian worldview celebrates capitalists who are loyal, good, and patriotic-those working daily to make America great again. These "uninationals" are manufacturers (and ranchers and farmers) who own their businesses and produce goods right here in the good ol' U.S. of A. These are the real patriots. These are the businesspeople that trade policy needs to foster and protect.

This perspective explains why Trump stated, "Tariffs are not just about protecting American jobs, they're about protecting the soul of our country. Tariffs are about making America rich again and making America great again." In this worldview, there is something deeply anti-American about both non-Americans and the U.S. globalist cabal that, in their eyes, has led the United States to the terrible predicament it's currently in.

But there are heroes in this story, and their Washington home is the Coalition for a Prosperous America (CPA), a trade association and advocacy group formed in 2007 by Michael Stumo. CPA describes itself as:

The only national non-profit organization representing exclusively domestic producers across many sectors and industries of the U.S. economy. We are an unrivaled coalition of manufacturers, workers, farmers, and ranchers working together to rebuild America for ourselves, our children, and our grandchildren. We value quality employment, national security, and domestic self-sufficiency over cheap consumption.

As such, its members include domestic producers like Hewes Fastener, a screw manufacturer; Council Tool, a maker of axes and related professional tools; and Welborn Cabinet, a manufacturer building American-made cabinets. CPA's members are generally low- to mid-tech companies selling products that face intense global competition and desperately seeking protection.

Along with other nationalist protectionists like Peter Navarro, Trump brought Stumo into his cabinet as Associate Director for Economic Policy and the Made in America Office at the Office of Management and Budget (OMB), where he reports to OMB Director Russ Vought.

Time for Revenge From All the Bullying

Many of these folks are not just passionate, they are riled up, seeing the world in Manichean terms. You are either a patriot or a traitor; a soulless globalist or a nationalist. For many, there is no middle ground. This is a war for the survival of the Republic against globalists and their lackeys who would sell out America. As such, theirs is a take no prisoners approach.

Dan DiMicco-former CEO of a domestic steelmaking company, former chair of the Coalition for a Prosperous America, and a key trade advisor to Trump before his 2016 election-is a case in point. After I replied to a tweet of his, saying, "China is our adversary. Not Canada. These tariffs divert from building an alliance to confront China," he responded with, "As usual you are lost in your ignorance. Shameful Robert! You have lost the argument so now you resort to despicable name calling. Like I said, shameful, bordering on evilness. Go back into the hole you crawled out of."

To be sure, over the last two decades, Washington globalists have contributed to the nationalists' sense of righteous anger by mocking and reviling them. As one leading Trumpian told me just this week, "Rob, for years, we protectionists were seen as being on the same level as pedophiles; now we are in charge." Trump himself experienced this treatment as far back as the early 1990s, when he warned that America was losing. Like many who have been mocked and rejected, these nationalists have a long memory of humiliation. And now, with Trump, the chickens have come home to roost-they can call the shots and give the globalists their rightful due.

What's Behind Their Thinking?

But revenge is not the only, or even the primary, reason for the new trade world Trump wants to build. It stems from fundamental views on how the global economy works and what America should do.

First, trade deficits equal a loss of wealth. President Trump equates a trade surplus with prosperity and deficits with poverty. In reality, trade deficits reflect excess short-term U.S. consumption in exchange for debt. And the most important factor in determining U.S. wealth is domestic productivity across all sectors, not just agriculture and manufacturing.

Second, all goods-producing sectors are created equal. Like free-market globalists, they think, "Computer chips, potato chips-what's the difference?" The former meant that no sector was more important than another. Trumpian protectionists take the same view-but apply it to manufacturing. To them, a company that casts metal hammers is no less important than one that manufactures 3 nm semiconductors. A firm that makes t-shirts is just as important as a company that produces jet airplanes. A farmer raising chickens or growing rice is as vital as a firm producing life-saving drugs. In their view, it's all manufacturing, and it all employs the sainted blue-collar worker.

Third, there is no difference between "friend" and "foe." In their America First approach, traditional alliances don't matter. The only thing that matters is the extent to which the administration believes a nation is taking advantage of America. That is why they can impose a 32 percent tariff on all imports from Taiwan while imposing only a slightly higher tariff of 34 percent on China, as both run trade surpluses with America.

Fourth, America must be self-sufficient. Trumpian protectionists refuse to accept a world in which America cannot make everything it needs-just as it supposedly did before World War I, at what Trump sees as the height of American greatness. When he threatened tariffs on Canada, he argued that the U.S. doesn't need their imports because we can make everything domestically. The reality, of course, is that this is impossible. But in their world, it is not.

Fifth, global markets aren't necessary. Building on the point above, they reject the idea that some industries, particularly those advanced industries with high fixed costs relative to marginal costs, need global markets to thrive. In their view, the U.S. economy is more than big enough to enable firms to succeed without relying on foreign consumers. Try telling that to Boeing, Merck, or Intel, who will likely face steep tariffs on their exports as other nations would retaliate, closing their markets to America.

Finally, the playing field must be absolutely even. In the Trumpian trade worldview, any imbalance in competition is an absolute disadvantage. In their minds, there is simply no way to compete with a nation that pays lower wages than the U.S., even if that country's worker productivity is lower. Of course, that belief is wrong.

What to Do?

Like so many other Trump policies, most of which respond to perceived excesses of "the other side," the most likely way to achieve a rational middle ground is to wait out the storm. Let them vent their frustrations and anger, wait for the inevitable overreach and problems that follow, and hope that opens the door for saner, more rational voices. However, this provides little comfort to the domestic and foreign interests hurt in the meantime.

In the short term, U.S. companies seeking to mitigate the negative impacts of Trump's tariffs will need to continue making their case-not only about how some tariffs are harmful to American interests, including the loss of manufacturing jobs, but also about how these companies are working to restore American manufacturing greatness. Notification by certain U.S. and foreign firms about new planned investments in America is a step in the right direction.

For foreign nations, the path is different and harder. It's unclear how much Trump is pursuing the "art of the deal" as opposed to simply erecting a big, beautiful tariff wall. But in his speech announcing the tariffs, the President did say that if other countries dropped their own barriers, stopped manipulating their currencies, and bought more from America, he would be open to negotiating the tariffs down to the baseline of 10 percent.

However, to start with, nations do need to recognize that Trump has legitimate concerns. The United States is running an annual trade deficit of over $1 trillion. Its manufacturing base has been severely weakened, and many other nations have engaged in unfair trade practices. For too long, U.S. administrations did little to change this. As such, Trump's approach can be seen as a necessary reaction to these excesses.

This means that other countries, especially those running a trade surplus with the United States, need to come to the table with an open mind-ready to play ball and address legitimate concerns from the administration. Of course, if Trump isn't serious about negotiating and is simply playing the longer game of economic coercion, these nations should withhold concessions, especially in advanced sectors. But calling Trump a protectionist and immediately defaulting to retaliation is not only disrespectful, it's a massive tactical mistake. There is truth in what the White House says when it calls out other nation's trade protectionism. Rather than fulminating in protest, other countries need to take a deep breath, assess the extent to which Trump is right, and make serious attempts to address the irritants. If they don't do that, they will be adding to the balkanization of the global trading system as much as Trump is.