Trump's Tariff Policy: " Revenge of The Nerds"

Supporters of Trump's tariff policy might refer to it as "The Empire Strikes Back." Critics, myself included, would describe it as "Revenge of the Nerds."

This tariff policy's economic and financial effects will increase production costs, and decrease the volume of goods sold. Businesses and employees prosper when economies expand, but Trump's tariff policy will have the opposite effect.

The rationale behind Trump's tariff policy is that by imposing significant tariffs on imports, it could tilt the competitive balance towards producing manufactured goods in the US. However, the flaw in this reasoning is that American companies have relied on high-quality, lower-cost imports to enhance their competitiveness, both domestically and globally. Eliminating this source of products will make it more expensive to produce and shrink the scale of its global production platform and its customer markets.

Currently, the dollar value of global trade in goods is estimated at $25 trillion, The combined dollar value of US exports and imports of goods exceed $5 trillion, or roughly 25% of the flow in global trade. Imposing a significant increase in tariffs on such a substantial portion of global trade will lead to widespread economic and financial turmoil.

Economic activity (GDP) measures the flow of commerce, the production and sale of goods, and the delivery of services. During the pandemic I argued that investors should prepare for a record decline in GDP because the federal government stopped the flow of commerce by ordering businesses to close and people to stay home or be idle. My estimate was off by a factor of 5X as the economy shrank by a record 35% annualized in Q2 2000.

The sudden and huge increase in tariffs has the potential to create a pandemic-like effect on economic activity. Companies and consumers are not going to pay for the dramatic jump in tariffs, so sales plunge, orders cancelled, layoffs will surge.

Supporters of Trump's tariff policy would call this "short-term pain." However, a 5% reduction in GDP and a 200 to 400 basis point rise in the unemployment rate is not merely short-term pain. It constitutes an economic recession, linked directly to the "Revenge of the Nerds."