How to Navigate the Tariff Circus

Quite accidentally, it looks like we timed our last talk about the stock market pretty darned well. Back in February 2025, the market put the perfect cap on a multi year climb before stepping onto the wild roller coaster we’re currently riding. Since then it has seen some of the steepest drops and recoveries in history, losing a full 20% of its value at the bottom while somehow managing to end up right back near the peak as I’m writing this.

And although stock market volatility doesn’t always come with an easily labeled explanation, this time the reason seems pretty clear: it’s the Tariffs.

As our financial world has been whipped around like a circus tent in a hurricane for the last several months, almost everyone who has a stake in this country has been wondering what to make of it.

• Can our president really unilaterally impose 145% tariffs on almost everything from our biggest supplier?
• And if so, is it really going to happen?
• And if so, what is the point? Aren’t free trade and low prices a good thing?
• And perhaps most importantly, what would the long-term effects on our economy and stock market be under varying levels of tariffs?

As I write this, we still don’t know the outcome of the worldwide tariff and trade battle that our unpredictable government has unleashed upon the world. But we’re already seeing the results: businesses are bracing for massive changes, currencies and interest rates are reacting, and regular investors like you and me are wondering what the future holds for our early retirement funds. Surveying my own group of friends, the reactions span the whole range of emotions from “this is a giant Nothingburger” to “we’re all totally screwed.” 

So what’s the real answer? To get closer to that, we should start with the most basic question of:

What is a Tariff?

A tariff is just a sales tax charged by our government on goods which are imported into the country.  They are paid by whoever is doing the importing – meaning you if you order something like an e-bike directly from a company in China, or by companies like Amazon, Walmart, or Apple which import products from other countries by the shipload. 

But in the end, the tariffs aren’t paid by China or Amazon or Apple. They are paid by you, the end consumer, because if their cost of goods increases, a retailer is of course going to raise their prices to continue to make a profit.

Tariffs also affect companies directly: if Home Depot wants to build a new store or Chevron needs a new oil rig, the tariffs on imported steel, copper, lumber and a million other components will raise the cost of these construction projects. And they raise the cost of housing, because most of the building materials in houses come from multiple countries as well.

On average, tariffs will result in higher prices for everything just like any other broad-based sales tax. And just like most other taxes, the overall effect is to slow the economy and reduce our spending power. On the positive side, all that tax money flows into the government’s pocket which could help fund the national budget and even reduce the deficit.

Of course, every government needs at least some tax revenue to function, so it makes sense to use some mix of sales, income and corporate taxes to get there. The most important part is that the levels need to be as low as possible while still keeping the country running well, and as fair and predictable as possible, so that people and businesses have an incentive to work hard and the ability to plan far into the future. 

And that’s where our current tariff regime gets it completely backwards. Donald Trump is throwing around random, extremely high tariff numbers as threats, then walking them back and changing them on an almost daily basis.. 

Whoa, that Sounds Mostly Bad – Is There a Good Side of Tariffs?

Sometimes, a country will use tariffs to protect their own domestic industries. For example, if you put a tax on imported Hondas, then General Motors cars will gain a competitive advantage – so GM will make more money. In this example, most consumers end up losing due to increased prices and decreased selection. But at least domestic auto manufacturers and their employees are happy.

This can be strategic (for example we might want to slap a tax on imported fighter jets to make sure Boeing and Lockheed can remain in business, for national defense purposes.) Or it can be corrupt (a politician might receive funding from kingpins in the steel industry, and in return then push through tariffs on imported steel to protect the profits of US steelmakers.) 

And this isn’t just a Trump or Republican thing either – Joe Biden used tariffs during his terms in an attempt to please swing-state voters. One of the worst examples was a tax on imported solar panel components (which Trump has since raised even further, proving that Boneheadedness can be Bipartisan). These are sheets of cheap glass that literally pump the cheapest energy and easiest wealth into your country for 30 years as soon as you plug them in. Cheap energy lowers everyone’s cost of living while also boosting industry. There is no good reason to block such wealth from flowing across your borders.

Can Tariffs Bring Us More Jobs?

Let’s go back to that hypothetical tax on Hondas, and let’s say it’s a big one like $5000. At that level, many buyers will start heading over to the GM dealer next door to consider what he’s selling. Sure, the GM cars may not be as good, but for five grand some people are going to settle in order to save some money.

Because of this, GM’s sales go up. So they hire more employees and build more factories. They might even develop some new models and new technologies in response to all that new demand. More people learn advanced skills and in the best case it becomes a virtuous circle.

But in exchange for this boom in the auto industry, everyone else has to pay more for slightly shittier cars and trucks. Higher vehicle prices means Amazon will have to spend more on their delivery fleet, so they will raise prices slightly on everything they sell. Somewhere a startup company or a medical breakthrough will be just a bit less likely to happen, because they are operating in an environment that is just a bit more expensive and a bit less efficient.

On top of that, with GM liberated from the hassle of competing with Honda, it will have less incentive to innovate and streamline itself. So its overall trajectory will be slower and less efficient even if its profits are higher.

This big picture effect is why most economists agree that tariffs should be used very sparingly. They almost always cause unexpected damage, decrease overall employment and slow down an economy, but sometimes (like for food security or national defense) those costs are worth paying.

So Why is Donald Trump Throwing Around Tariffs Like They Are The Best Thing Ever?

This has been confusing to almost everyone. If you take him at his word, he appears to have a Bizarro Opposite Universe belief system about economics. Donald has claimed in speeches that the tariffs will somehow make us wealthier. He’s focusing on the first-order effects like GM hiring more workers, while completely ignoring the fact that everything else in the country gets less efficient in exchange. 

But when he announces larger tariffs, share prices go down, because everyone who actually runs or invests in US companies knows that of course they will make less money on average. When tariffs are paused or reduced, share prices go back up. Yet he keeps wielding the threats and we go back and forth. 

It seems to be obvious to everyone except Donald himself that Tariffs are just a national sales tax rather than some clever sneaky strategic weapon, which leads to various theories that okay, maybe he knows that too but is just pretending in order to gain some influence. 

The basic theory goes like this:

• Unfettered power: normally, a president can’t impose taxes without the approval of congress. But there’s a loophole to that: a president can unilaterally impose taxes under the disguised name of “tariffs” in the case of an “emergency”. Furthermore, another loophole exists: there’s no strict definition of “emergency” – so if you just invent a fake one you can start imposing tariffs until congress eventually catches up to you. Which may not be for years.
• As a Negotiating tactic: although the primary victim of tariffs is US consumers and businesses, they can also harm our trading partners, because if you impose a high enough tax on Chinese goods, we’ll buy a lot less of them. So now you have unfettered power which you can wield against your foes, as a way of getting them to do stuff  for you.
• As a way of controlling domestic companies: if you can cut off the lifeblood of any company (their supply chain) with just a quick post on your Truth Social account, you’re suddenly in control of the whole economy. Nobody can oppose you because you can put them out of business immediately. 

So right now our entire economy is subject to the whims of a single person.. And as long as this is the case, we’re just the same as any other dictatorship – something our constitution was supposed to prevent with the whole “three independent branches of government” thing. 

But presidents have tried to break out of their constitutional cage and get more power many times in the past, and this is just the latest example. The real test will be if our system eventually manages to stop this abuse and put itself back in balance as it always has in the past. You can already see this fight beginning to play out in our court system, in this Economist article:

How Big are the Tariffs Right Now?

Even without the 145% nonsense numbers that were thrown around a few months ago, they are still far higher than they have been in the last 75 years or more. While it would be hard to pin down the current numbers in a stationary blog post like this one, the key thing to remember is that our current US economy is built around very low tariffs and relatively free trade. 

Why haven’t I noticed Prices Going Up Yet?

While the US economy is fueled by a constant stream of cargo ships, as a whole we function like the biggest cargo ship of all: we have a huge inventory and it takes a while to change directions.

So in normal times, we already have several months of inventory of most things in the country. And then when all this drama started, importers started placing even more orders to stockpile things in advance before the tariffs hit. And now that they are in place, we’re importing a lot less stuff.

For now, we’re still using up the stockpiled inventory, but imports have dropped significantly so we’re quickly running out of cheap goods. If that happens, we will probably start seeing shortages and price increases throughout this summer or fall. For some things like plastic party trinkets, we can do just fine without. But if we lose access to core useful things like tools and machinery, the economic consequences will be much less fun.

The Dark Side and the Bright Side

The most important phrase to remember in US politics and economics is the phrase “This too shall pass.” The only mystery right now is that we don’t know exactly how it will pass. So we could sketch out a few scenarios:

1) The current crazy-high tariffs really do stick around:

I personally think this is the less likely scenario because nobody really wants it. But just as a thought experiment, it might go something like this:

• 2025 inflation would more than double as the tariffs add about 4% to prices
  (because imports are roughly 25% of our overall spending, and current tariffs are about 16% higher than before. 0.25 * 0.16 = 0.04)
• Lots of companies will make changes. Those most dependent on cheap imports from China might simply go out of business. Some companies will shift to suppliers in lower-tariff countries.
• In some cases, US factories will benefit. We’ll produce more steel and certain auto parts here, but you’re not going to see a million factories popping up to make Nike shoes or microwave ovens – those things will just get a lot more expensive to buy. 
• Demand for unpleasant, repetitive low-wage unpleasant factory work will increase, which should help raise the whole lower-income wage pool. But the cost of living for these people might more than outstrip these wage gains. Plus, those jobs will eventually phase back out as manufacturers continue to build robots to automate those jobs.
• Other countries will continue to retaliate with tariffs on US goods, which means our exporting companies will lose revenue. For just one fun example, Canada recently imposed a 100% tariff on Tesla cars from the US, almost completely destroying that company’s Canadian sales overnight.
• Government tariff revenue could go up by about $640 billion annually (about 15 percent of our total budget), but the reduction of economic activity and exports would reduce income tax revenue by an unknown amount – possibly an even bigger number.

2) They do end up being just a negotiating tactic and we go back to mostly low tariffs.

• The stock market would stage an enormous “relief rally”
• Companies will gradually start to relax and go back to the way they were, allowing for more planning and hiring to resume
• We will escape with just a few hundred billion dollars of lost economic activity and a moderately large hit to our credibility as a nation, which will fade over time just like everything in politics
• Some of the “deals” which are part of the negotiations (for example, lower tariffs in other countries) may have benefits for US exporters, helping boost our future trade

In other words, the best way to win the tariff game is not to play it.

Just as much of US prosperity is built upon our huge population of 330 million people living in 50 states with open borders and no trade restrictions, all (friendly) countries of the world can benefit from the free exchange of goods, services and even people. We’re all human beings and if we treat each other with a collaborative respect, we all grow richer.

Epilogue: Is it Almost Over Already?

I started writing this article on April 2nd, when Donald announced his “Liberation Day” and the stock market reacted with the biggest drop since 1932. Some people panicked and locked in big losses despite decades of warnings from your favorite financial bloggers, like this unfortunate soul in the comments to a JL Collins post:

But as I watched over the next two months, we have bounced our way back up – with each drop in proposed tariffs triggering a corresponding increase in stock prices (a measure of investor enthusiasm of how bright our future looks).

Right now, the US stock market is just about back to its all-time high. This doesn’t match with our current level of tariffs, which are still about seven times higher than they were before the circus opened. But it shows that investors believe it’s all going to end with a truce and a resumption of free-ish international trade.

If they’re wrong, the roller coaster ride will still have some more fun in store for us. But as long as we eventually end our current experiment in “emergency” tariff dictatorship and get back to functioning as a democracy, things should be just fine in the long run. I’m still 100% invested myself, so that’s where I place my bet.

The Biggest Lesson: Don’t Form Your Opinions Based on News Headlines

Decades ago in a brighter age of journalism, there may have been a time when headlines were designed primarily to inform us, with just a bit of sizzle and spice to pull in our attention. Unfortunately, nowadays the priorities have flipped where the primary goal is attention, and accuracy carries little or no weight. Even a totally inaccurate article makes money for the publisher.

So while Democrats and Republicans like to do battle over which media sources are biased, in reality they’re all wrong: all click-funded commercial media is biased – sometimes politically but even more importantly biased towards generating outrage and fear, because those generate more money.

There are two solutions to this:

1) Either ignore the media completely and focus on your own life, or

2) Become a subject matter expert on things you really care about, and then read the original sources whenever you want to learn about something.

I mostly practice option #1, but as a science and technology nerd I get into #2 in just the areas I find most interesting. And it’s amazing how the more deeply you understand a subject, the more you see just how wrong most media stories are about your area of expertise. Which means they’re probably pretty wrong about almost everything.

So as always, with this lesson learned it’s time to shut down that phone and laptop, exhale all our worries and get back outside with your real-life family and friends. See you in a few months!

Related:

Why We Are Not Really All Doomed – the original all-purpose MMM article which explains why we never really have to worry about the long-term economic future.