No, You Can't Tariff Your Way to the Promised Land.
Tariffs erode American economic and innovation leadership while helping adversaries. || Two reasons the Trump tariffs are vastly worse than imagined. || There are FAR better ways to compete and win.
Liberation Day: highest stakes economic gamble in history
President Donald Trump called it one of the most important days in U.S. history, declaring a new economic world order with America and a revitalized manufacturing sector as its beating heart. But is this multi-trillion dollar, all-in bet on the mark? Can tariffs exceeding Smoot-Hawley trigger a manufacturing renaissance? Will there be a positive knock-on effect, reducing interest rates, making it easier to tame $36.1 trillion in debt?
The immediate response was predictable. Sticker shock. Mockery at how the tariff rates were calculated—and who was targeted. Markets delivered the “largest two-day wipeout of shareholder value on record.”
Trump’s charts have let loose the dogs of economic war. China quickly matched their 34% tariff; new pacts and alliances are forming on the fly. In the coming weeks and months, national counter-measures will be deployed, markets will assess the merits of each case, and capital will flow accordingly. Make-or-break investment decisions will confound firms from Cupertino to Copenhagen. Citizens will use their wallets and the ballot box to make their sentiments known.
What is unfolding is a high-stakes global referendum between blanket-tariff unilateralism and freer-trade multilateralism. With reputations and economies at stake, who really holds all the cards?
Build it here: the underlying ideas worth understanding
The Liberation Day brand caught on immediately. Belief in its meaning did not: blocking opportunity in the name of freedom feels innately wrong. When goods cost more and with less money to go around, people are inarguably less free than they were before. Businesses are less free when higher costs slash profits; workers are less free when losses precipitate unemployment. For these straightforward reasons, blanket tariffs are rarely the ideal weapon of choice, despite legitimate geopolitical concerns.
—Signalling Confidence, National Security, and Strategic Advantage
That’s why the Trump administration’s declaration of economic independence signals such strong confidence in American economic inventiveness and might. Across-the-board tariffing is not only viable, goes their thinking, it anchors a game-changing America-first economic model with repatriated manufacturing situated at the epicentre. It replaces and weakens its main strategic adversary, China, along with dozens of other countries, including Canada and, uh, the E.U. Stay the course long enough, continues the reasoning, and new plant and equipment will inevitably spring up across the United States. American ingenuity, scale, and a massive head start in AI-related infrastructure will erase strategic weakness, and American manufacturing will be great again.
—4D Chess? Tariffs and Debt Reduction
Trump has intentionally injected uncertainty into the stock market, according to a provocative theory that pairs tariffs with debt reduction. Forcing liquidity out of stocks and into bonds lowers bond yields, making it less expensive for the government to pay down its debt. Add to it the spending reductions wrought by DOGE and you’ve got a leaner, less expensive U.S. government fuelled by a reinvigorated, colossal manufacturing sector.
—Globalization of Manufacturing Hasn’t Fulfilled Every Promise
Feeding into the bring-it-home sentiment is the accumulated resentment of decades in which entire categories of manufacturing—textiles is a common example—have evaporated from the U.S.A., Canada, and Europe, replaced by low-cost alternatives in places like China, Vietnam, and Bangladesh.
We have been ripped off for decades by nearly every country on Earth, and we will not let that happen any longer. President Donald Trump
Further, one of assumed benefits of globalized manufacturing was that rising incomes and exposure to the democratic freedoms of the West would trigger the same desires in China, with a liberalizing effect. Instead, the opposite happened. China’s state capitalism model has given rise to a manufacturing and military Goliath, with less freedom for its citizens, not more.
It is an absolutely legitimate desire to repatriate manufacturing, and to rethink aspects of global trade. These include strategically important technologies, national security, and long term employment—what work will people do and how do we build those industries?
But none of these things are best solved with tariffs. The debt reduction theory flies in the face of economic reality. The legitimate challenges America faces didn’t have to result in breaking alliances and pushing otherwise friendly nations into the embrace of adversaries.
Uncomfortable Truths and Disconfirming Facts
Tariffs are a tax: The tariff on an imported good is paid by the importer, e.g., Home Depot. Home Depot pays the tariff fee to the U.S. government. Home Depot’s costs go up by the tariff amount. Tariff costs are almost always passed along to consumers.
Economic warning signs: Across-the-board tariffs raise the price of nearly everything. The effect is inflationary. When things cost more, people and businesses buy less. When they buy less manufacturers cut back on production. Less production means lower demand for labour, leading to unemployment. Consumer confidence is very low: the Expectations Index sits at 65.2—the lowest in 12 years—and well below the 80 threshold where recession worries begin to crystallize. Stagflation—high inflation, stagnant economic growth, and rising unemployment—can’t be ruled out.
New trading blocks are emerging in real time: Nations are free to pursue their own interests. If there are economic, intellectual, strategic reasons for teaming up, they’ll do it: there are no guarantees that foreign companies will build plants in the States. Some manufacturers might leave the U.S. if (1) imported inputs make US-based production too expensive, and (2) countries offer compelling financial incentives.
Retooling takes time: Too many people see manufacturing in simplistic terms. It simply isn’t plausible to retool the entire automotive supply chain within the United States without countless billions in cost and years in construction. Money that could have been invested in next-generation technologies instead gets diverted into switching costs, all while needlessly expensive vehicles cause sales to sag. And if the uncertainty is intentional, indefinite delay on major investment decisions will result.
If it ain’t broke, don’t fix it. The U.S.A. is already an advanced manufacturing leader. Aerospace. Biotech and pharma. Semiconductors. Robotics and automation. Name an advanced manufacturing category and America is already ahead or neck and neck with China. That suggests doing more of what they’re doing now, i.e., what has led to the U.S.A. leading in such vital industries, and how can that advantage be maximized?
And now for the really bad news
—Part 1
Global trade in 2025 is not the global trade of 1985. Services constitute an enormous amount of trade based on intangibles like intellectual property and digital services. Harvard’s Ricardo Hausmann estimates the U.S. runs a trillion dollar annual surplus in services. When American foreign operations are included (Apple operates in 43 countries and sells in 150) the U.S.A. collectively holds as much as $16.4 trillion in overseas assets.
The fundamental flaw in Trump’s strategy is that it focuses on the trade deficit in goods while overlooking the much larger role that services, intellectual property, and investment play in the global economy. Professor Ricardo Hausmann of Harvard Kennedy School and Director of the Harvard Growth Lab.
This is very bad news for several reasons:
Trump’s claim that the U.S. is being ripped off completely omits services from the calculus. He has left $16.4 trillion in overseas assets exposed to retaliation, assets that can in no way be repatriated.
The retaliatory tariffs Trump brandished at the White House appear to be based on trade deficit calculations, not published tariff schedules, meaning…
…If the U.S. abandons the rules-based order that has made it the world’s economic superpower, e.g., Google, Apple, Microsoft etc. then other nations have every incentive to do the same. The costs to American firms could be immense.
—Part 2
Trump has repeatedly said that tariffs will generate hundreds of billions in revenue used in part to fund income tax reductions. (While failing to mention that the ‘revenue’ is a tax on American businesses and consumers). The concept envisions rebuilding American manufacturing while keeping costs low.
What is not mentioned is government investment. The lead America holds in fields like robotics, automation, biotech, aerospace, and pharma is directly connected to cutting-edge research and development conducted and funded by government agencies like NASA, NIH (National Institutes of Health), NSF (National Science Foundation), and the SBA (Small Business Association).
And therein lies a massive problem. If the idea is to be the world’s manufacturing superpower, the engine must match the ambition. America’s USP—its unique selling proposition—is based on inventiveness and competitive spirit. But when research funds are cut, future discoveries and breakthroughs never happen. When tech transfer from universities to startups is curtailed, the historic American innovation advantage starts evaporating. Trump’s higher cost, reduced-investment environment creates incentives for former partners to exclude the U.S. from productive new alliances, closing the competitive gap. It’s a deeply harmful own goal.
—Eyes on the prize
The sad thing is that no one wants this. More high-skilled jobs and fewer Walmart greeters is in everyone’s interest. Would it not be more beneficial to deepen economic ties with allies and get to the win faster? And, if China is indeed a political and military threat, wouldn’t a more targeted tariff strategy strengthened by strong, partnership-based economic unions be the smarter play?
Winning in 2025 is different than winning in 1985
Here is a basic formulation: more ideas → more output → more people → more ideas. You can see the scaffolding of an innovative economy within it, producing wave after wave of more and more sophisticated goods and services. It neatly explains advanced economies’ success once you see that new ideas need to come from somewhere—like leading-edge university research—and that output results from a series of stages including technology transfer, and starting and scaling new ventures.
The formulation is the DNA of competition, the basis upon which every game is won, from geopolitics to small business.
What people miss—what Donald Trump certainly seems to have missed—is the dramatic shift in the nature of modern competition. Everything is more complicated, interconnected and specialized, with AI increasing the pace and payoff by orders of magnitude. Labs require specialized infrastructure. Research teams need compute. Startups need data and sufficient capital to adapt. They all exist within city and regional ecosystems where local business, government, academia team up to create conditions where innovation thrives. Nations form trade agreements because they bring complimentary skills and resources to the table. The shift is from one to many, with each member playing a specialized role.
Liberation Day won’t lead to economic independence. You want freedom and independence? Invest in people. Create the conditions for innovation to thrive. Build the infrastructure, attract the talent, eliminate the barriers.
Show leadership.