It seems not a day goes by where we are not inundated with the word “tariffs”. Not that they are new, but that they are being used in new and naive ways. The American public is being fed a plethora of great and terrible news based on the messenger. Is it a revenue generating machine or a tax? Who is paying? To be clear here it is not the exporter. Does it give us leverage in the negotiations? A short versus long term question. Manufacturing will be brought back to America and create jobs. We will never be going back to the fifties, but some will try. Foreign nations with a trade surplus with the United States have been screwing us for decades. Maximizing shareholder wealth would say otherwise. Will inflation come back with a vengeance? It almost certainly will. In the end we are left with uncertainty. Global markets hate uncertainty.

Tariffs are pretty simple, they are a tax on American consumers. The Country levies a 25% tariff which the importer pays upon receipt of the goods. The importer than must decide do I eat the cost of the increase in cost or pass onto to consumers. Since eating the cost eats into profits the latter is usually preferred. Tariffs were one of those things you learned about in business school. A pretty simple device for aiding domestic industry. The steel industry was always a good case study. Unable to compete against foreign competitors from South Korea and Japan. The US government many times has issued tariffs to help make US Steel producers more competitive with foreign competition. But this is a individual industry case. Today we are looking at Tariffs more broadly. Blanket tariffs on entire countries.

One thing that gets underestimated in this disputes is foreign nationalism. In Denmark for example they are learning to not to be dependent on US manufactured or produced goods. They do not need Coca-Cola they have local colas they can turn to. On the labels of goods it is marked if it is made in European Union. The arrogance of the US is the belief that the world cannot live without us. This is always mystifying to me (USAID could be the subject of another post). Can a German citizen live without Nike? Probably very well. The Mexican President, Claudia Sheinbaum Pardo, out lined to her a country a whole list of alternatives to American goods. Buy Mexican…sounds kinda familiar. Countries when challenged or threatened look inward for solutions

China is the big target with tariffs. China has the largest trade surplus with the United States. In 2024 the United States had a goods trade deficit with China of $295.4 billion, according to the United States Trade Representative (USTR) (.gov). This represents a 5.8% increase, or $16.3 billion, compared to the previous year. A massive amount by any stretch of the imagination. China also holds $784.3 Billion in US Treasury Bills. This is down from the peak in November 2014 of $1.3 Trillion. During this Trump tantrum they have not played along. Though it looks like Trump will be visiting China in the near future. The difference with China is that it is the world’s second largest economy. It does have levers it can pull, unlike other nations. Given that we are adversaries I think it odd that China buys US Treasuries thus funding the US war machine. Though the downward direction I expect to continue. This would mean the United States needs someone else to pick up the tab. China also plays the currency markets. China pegged its currency from 1997 to 2005 to the U.S. dollar but since has managed its currency against a basket of currencies. The effect of the peg and the low currency is that Chinese exports are cheaper and, therefore, more attractive compared to those of other nations. China is investing heavily in tech and competing aggressively with the US. Thinking that China would bend the knee to US pressure was never a wise strategy.

The biggest issue facing the world is US leadership. In three years when there is another election the administration will change. Trump says he will try to change the election system. He wants to run again, however, he will be 82 years old. Thus the world can play the long game and wait until they get a more favorable alternative. The US capitalist system is designed for the short run. The two part election system is designed for the short run. As former House Speaker Tip O’Niel said, all politics is local. Most voters want to know, “What have you done for me lately”? Countries like China are thousands of years old. A decade is but a blip in time. WIll tariffs generate success for the US? I am skeptical as it has created an environment where the US is viewed as not trustworthy. The costs will be passed to US consumers, effectively a tax. Higher costs equals inflation and no Presidential candidate survives inflation. Just ask Joe Biden. In my view when it comes to Tariff’s 101 the current admin has a failing grade. They are treating the public as if they are dumb. We can read and the logic of tariffs is not that difficult. We have come across as a uncivil society. When you are the largest economy on the planet it is hard to argue you are being screwed. Threatening trading partners will have long term consequences. I am not too concerned about the US economy in the next 1-2 years but in the next 4 to 5 years….yes I am.

Good Night and Good Luck

Hans Henrik Hoffmann

August 6, 2025