The Case for Tariffs: Main Street vs Wall Street

I wrote the November election was Revenge of the Fly-Over States, “The Rust Belt lost manufacturing jobs for over 25 years as both parties advocated free global trade. Real income and property values haven’t changed much as a consequence. I’ve seen it every July in western Michigan in my in-laws small town. Small towns nationwide have lost jobs and are angry. It led to the Tea Party over bailouts to Wall Street in 2009. Trump listened in 2016 & MAGA capitalized on that anger. And now it’s grown to half of the country between the coasts - derisively called the “fly-over states”.

Reason 1: One-third of U.S. manufacturing jobs lost since 2000, shown on NewsNation Cuomo 4/18/25

On the Coasts, we have no idea what’s happened communities across this country. Silicon Valley, Hollywood and Wall Street have comparative advantage relative to other countries, while manufacturing jobs were lost across Middle America. J.D. Vance’s auto-biography Hillbilly Elegy documents the pain growing up in rural Ohio and the opioid epidemic borne from successive layoffs.

We’ll see how quickly companies shift manufacturing back to the U.S. Apple and Nvidia have each pledged $500 billion for manufacturing here but it’ll take 2 years to build new plants. Recently closed auto plants might be reopened faster, but bringing auto parts manufacturing back to the Midwest may take longer. Every new manufacturing job will create another 1.7 service jobs. Exports will grow after an initial disruption as trade deals are negotiated and encourage US exports to countries who do not retaliate.

Reason 2: China undervalues its currency 25-40% to make it’s exports cheaper

Most economists say tariffs are protectionist - protecting less efficient domestic industries. But China, for example, doesn’t compete on the same terms - for decades, China has undervalued their currency (yuan), some say by 40% relative to the dollar when calculated on purchasing-power-parity, so imports from China seem cheap. China also keeps U.S. industries from competing in their market, restricting our exports there, so now the U.S. trade deficit with China has grown to nearly $300 billion in 2024. On top of this China steals our industrial secrets (intellectual property) through espionage and hacking. And decades of trade deficits means China owns much of our national debt.

The Wall Street Journal, March 1, 2025

Wall Street hates tariffs

Wall Street values companies based on profitability (earnings per share), and stocks were priced for perfection in company financial performance. Most assumed tariffs were a negotiating tactic with Mexico and Canada over border security and fentanyl, so Wall Street was surprised by the size and breadth of President Trump’s tariffs. Most Americans are comfortable with “reciprocal” tariffs where we tariff imports from a given country at the same percent as they tariff our exports.

Wall Street and our 401(k)s grew steadily with rising stock prices fueled by companies’ profits from reduced costs as offshoring manufacturing to countries with cheap labor, especially China, for retailers like WalMart and Amazon, Apple, auto and appliance manufacturers, private equity and leveraged buyout firms. You may remember Oliver Stone’s movie Wall Street where Gordon Gekko says, “Greed is good.” Wall Street does not want to see profitable offshore supply chains unwound.

Inflationary impact will be low

The SF Federal Reserve calculated imported products and parts are only 10.6% of our consumption, since services are virtually entirely domestically sourced. So 20% average tariffs on 10.6% would mean inflation of 2.15%, although I’d expect Americans to shift their spending on products from higher tariff countries (China) to lower tariff countries like Chile (fruit) and Vietnam (clothes) or American-made products. I’d expect the Federal Reserve will hold on interest rate cuts until it has a better sense of tariff-induced inflation then start cutting rates before year-end.

Reason 3: Tariffs pay for extending tax cuts

The Trump administration expects $1 trillion in tariffs over the next year, which will enable extending his tax cuts from his first term. The Congressional Budget Office and Joint Committee on Taxaction (JCT) estimates extending the TCJA individual provisions would reduce revenue by $3 trillion from 2025 to 2034. So tariffs pay off tax cuts in 3 years, after which tariffs can balance the budget deficit and start paying down Federal debt, while GDP grows by .5%/year.