This is one of the better explanations I've seen
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Why are countries freaking out about US tariffs? Because they all have massive trade surpluses with the US.
If the US moved manufacturing domestically, the EU, Canada, Mexico and Chinese economies would collapse. They are completely dependent on net exports to the US.
In his first term Trump tried to make trade between the US and these “partners” more even-sided. He didn’t care what they bought. But they simply refused to buy more from the US, mostly because what the US can export competes directly with sensitive domestic industries (farming).
At this point, Trump 2.0 knows that they will simply refuse to buy more, even if they’d promise to do so.
And therefore moving all manufacturing domestically is the only option left. And that can only be achieved through tariffs, de-regulation, and lower income & corporate tax.
This is not an opinion if tariffs on their own are good or bad (hint: they fully need to be combined with lower rates, de-regulation and lower taxes to work). The trade numbers and the history here speak for themselves.
Also: For this to actually work, it can’t be a bluff!
Btw, why is manufacturing so important? In economics it’s called “the multiplier effect”. A new job in manufacturing, creates 4.4 new other jobs in the local economy. For every $1 in manufacturing GDP, $2.74 is added in non-manufacturing GDP (NAM data).
Manufacturing is key.
If (and only if) implemented correctly, tariffs will force corporations to move massive capex investments & jobs into the United States over the next few years. An economic renaissance. Why? Because the US market is 30% of global consumption, while having 4% of population.
This will only happen if the tariffs are perceived as permanent and increasing over time, not if people believe it’s just a “negotiation tool”.
No one makes a $ billion+ decision to build a new factory based on a bluff. Permanence in tariffs is necessary for success.
Those corporations who move the fastest will win, because they will be able to establish themselves domestically in the US at lower cost. Those who believe it’s a bluff and that the decision will be reversed will lose.
But this is only contingent on this not being a bluff.
Now remember, this only works because of the size of the US domestic market. It’s also why tariffs work for India (highest tariffs on the planet) and China (tariffs 2x US levels), leading to high growth and low inflation. Those who decide who has access call the shots.
How this will play out over a short term? Well, anything that creates uncertainty and which market participants can’t fully understand (because it isn’t the norm) is by default bearish. Volatility UP!
What will happen to FX, rates, inflation etc? No one the f**k knows.
The fact that people are speculating about if this is “real” or if it’s a negotiation tool in itself defeats some of the purpose of these policies.
If the full plan was clear, the market would quickly adjust and look beyond short term issues. Right now, it’s not clear at all.
If I was advising the government I would quickly come out with a very clear step-by-step plan of what the steps are and what the ultimate goal is. Make it very clear “that this is the plan” and “this is how it will be executed”. That this is not bluster.
https://x.com/ecommerceshares/status/1886119080970612806