Tariff: The Bad, The Ugly, and Some Good?

We are navigating uncharted territory. However, there is a silver lining.

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Photo by Maksym Kaharlytskyi on Unsplash

Let’s be clear about one important point: tariffs act as taxes on imported goods, which raises their prices. As a result, it is the businesses and consumers in the importing country who ultimately bear the burden, facing fewer choices and higher costs. On their own, tariffs are damaging and detrimental to the economy of the importing country. Businesses and consumers are wary of tariffs because no one enjoys paying more for less.

What most businesses, investors, and consumers loathe even more than tariffs is uncertainty. Since April 2 (the "Liberation Day"), when President Trump announced upcoming tariffs on nearly all imports, the stock market has experienced much turmoil, dropping like leaves almost everyday. Following Trump’s announcement on social media regarding a temporary pause on “reciprocal tariffs” for nearly 100 countries, excluding China, there was a brief surge in the stock market. Yet, by Thursday, it resumed its decline, highlighting that this pause has only added to the prevailing uncertainty. The weekly chart of stock market performance is one of the ugliest graphs I’ve ever seen.

The White House asserts that everything is unfolding according to a master plan, including the pause from Wednesday. However, I find this hard to believe. Drawing on my more than two decades in the financial services industry, it's clear that the recent selloff in the bond market likely played a significant role in pushing Trump to rethink his sweeping “everything everywhere” tariff strategy.

Most people tend to overlook the bond market unless they are professional investors, as lending money and earning interest income can seem uninteresting. However, the U.S. bond market is significantly larger than the U.S. stock market and plays a crucial role in financing everything from government operations to personal home purchases. The yields (interest rates) on 10-year and 30-year Treasury bonds have a more significant impact on people's everyday lives than many realize, influencing rates for credit cards, car loans, mortgages, and many more. When investors sell bonds, it causes bond prices to drop and yields to rise, which in turn increases borrowing costs for everyone, including the federal government, which carries over $36 trillion in debt.

Recently, turmoil in the bond market was primarily driven by anxious investors selling off bonds, especially U.S. Treasury bonds. Their concerns stemmed from a combination of economic uncertainty, fears of a looming recession, and potential retaliation from China. As the second-largest foreign holder of U.S. Treasuries, there was worry that China might sell off its holdings in response to Trump’s tariffs, which could have serious consequences for the bond market. This collective anxiety led to the largest one-week increase in yields on 10-year and 30-year Treasury bonds since 2001.

This significant bonds sell-off prompted influential figures, including Bill Ackman, a well-known supporter of Trump, to raise their concerns on social media, advocating for a 90-day pause on tariffs. Trump, who has a background in real estate development and thus probably a better appreciation for bonds than the stocks, took notice of these voices and announced a temporary pause on most tariffs.

So, I touched on the bad and the ugly about tariffs. Some of you may be wondering: is there anything good about tariffs? My answer is yes. When other strategies to achieve critical policy objectives fall short, the ability to impose tariffs—or even just the threat of them—can be a powerful leverage for policymakers.

Take, for example, a recent incident regarding illegal immigration. Earlier this year, Gustavo Petro, President of Colombia, initially rejected two U.S. military aircraft that were tasked with flying back illegal immigrants to Colombia. However, this position changed dramatically after former President Trump utilized social media to announce punitive measures, including visa restrictions and a 25% tariff on all imports from Colombia, with intentions to raise it to 50% within a week. As a result, not only did President Petro consent to the return of those illegal immigrants, but he also offered to send his presidential plane to facilitate the process. This scenario powerfully demonstrates how tariffs can effectively sway some international negotiations and compel compliance with policy demands.

Before discussing Trump's tariffs on China, it's important to examine the Russia-Ukraine War, which can be seen as a proxy conflict between China and the U.S. Russia would not have been able to sustain its campaign for this long without China's economic and military support. China has been purchasing Russia's energy and agricultural exports while supplying Russia with a range of goods, from consumer staples to dual-use machinery that can be utilized in weapons production. Recently, Ukraine captured two Chinese citizens in Russian military uniforms, and it is estimated that at least 150 Chinese citizens are currently fighting for Russia on the battlefield.

Ukraine would not have been able to withstand the current situation without the support of the United States. However, the U.S. is now facing a pressing issue: our military aid to Ukraine has significantly depleted our stockpiles of certain weapons and ammunition. The stark reality is that our military-industrial complex is unable to quickly scale up production and is overly reliant on foreign supply chains. It's a sobering fact that the U.S. almost entirely depends on China, and to a lesser extent, Russia, to procure a critical mineral that is essential for producing ammunition.

It’s vital to understand that one of the primary reasons the Allies triumphed in World War II—beyond the valor of our greatest generation—was the United States’ industrial strength. Our ability to outproduce our adversaries enabled us to keep our allies well-supplied. The current conflict in Ukraine underscores a timeless reality of warfare: even in the 21st century, victory often hinges on attrition. Sadly, over the last twenty years, America has seen a significant decline in its industrial capabilities. Take shipbuilding as an example; today, China can construct battleships more quickly and affordably than we can. A nation that cannot reliably produce its own military supplies will struggle to succeed in future conflicts, particularly against a powerhouse like China.

Losing industrial capacity to China is only one of the many issues that strain the U.S.-China relations. Others include rampant IP theft, illicit drug trade including fentanyl, cyber surveillance of our infrastructures, illegal policing on U.S. soil, and many more.

Over the years, successive U.S. administrations have engaged in negotiations with the Chinese Communist Party (CCP) on these issues in good faith. However, while the CCP has made many promises, it has delivered very little.

Trump seems bent on overthrowing the existing trade order that he regards overly benefits China at America’s expense and establish a new one that enables the U.S. to become a manufacturing powerhouse again. Trump's significantly high tariffs on China seem to be the only measure that can capture the CCP's attention and prompt the party to consider making concessions. Both sides understand that the trade war extends far beyond mere trade issues, especially in the current context.

While I appreciate Trump's intentions and understand that tariffs can serve as effective leverage for achieving challenging policy goals, I believe his abrupt and blanket approach is highly risky. If I were in his position, I would focus on securing low or no-tariff agreements with our allies first, such as the EU, the UK, Australia, Japan, and South Korea. Once these partnerships are solidified, I would expand our efforts to include countries like Vietnam, which are not yet allies but could be brought on board.

Establishing this new trade bloc would then enable us to impose significant tariffs on China, compelling the Chinese Communist Party to negotiate due to their isolation. By targeting both friends and foes with tariffs simultaneously, Trump risks alienating allies and inadvertently driving adversaries closer to the CCP, thus hardening their resistance to U.S. interests. The uncertainty generated by this strategy could ultimately harm our reputation and our nation’s economy just as much, if not more. We are navigating uncharted territory and must observe how things will unfold while holding our breath. However, there is a silver lining.

On Friday morning, China raised its levy on all U.S. imports to 125% and declared that it would no longer match U.S. tariff rates in the future. They stated, “Even if the U.S. continues to impose higher tariffs, it would be economically meaningless and would become a joke in the history of the world economy.” While this may sound like mockery, I believe it is Chinese leader Xi signaling to Trump: “Okay, this is enough. Now let’s talk.” Maybe we will finally have some certainty soon.