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To Tariff or Not to Tariff, That Is Not the Question

Saturday, August 23, 2025 14:22

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The purpose of the Fed’s annual Jackson Hole symposium isn’t to make decisions about the short-term direction of monetary policy, but to consider the long run implications of policy. It is in that spirit we consider the short- and long-run implications of Trump’s America First policies.

The primary purpose of Trump’s policy initiatives is to reverse the multi-decade effects of globalization. Branko Milanovic’s landmark study showed that under globalization the main winners were the very rich and the emerging market middle class, while the developed economies’ middle class lost ground. Trump aims to reverse that trend. The question isn’t whether tariffs should be imposed or whether undocumented U.S. residents should be deported, but the trade-offs between the costs of those policies against the long-run effects on growth, inflation and productivity.

Consider the following thought experiment. A major earthquake devastates much of San Francisco and parts of California sinks into the sea. Thousands of the best and brightest in Silicon Valley are lost in the disaster. The NASDAQ opens up down -20% to -30% in the wake of the news. President Trump and the Fed Chair appear on television to reassure the nation and the markets.

The Fed Chair states that the Fed is prepared to use any and all liquidity measures to ensure the orderly functioning of markets. President Trump offers the following points:

America needs to look through this event as it’s a tremendous opportunity to rebuild. We are formulating a plan to develop property on the new waterfront.
There will be plenty of new job opportunities. All of the positions formerly held by foreigners in Silicon Valley can now be filled by Americans.
By the way, good riddance to all the liberals who populate California.

Trump’s response is a caricature, but here are my points. There is a well-known study which shows that nearly half of Fortune 500 companies were founded by immigrants or their children. Trump’s reshoring initiatives are aimed at returning low value-added manufacturing jobs that went offshore. Replacing Silicon Valley talent isn’t just a matter of numbers of workers, but the quality of worker matters too.

How are the markets likely to respond to messages broadly along these lines? Ben Graham once said that in the short run the market functions like a voting machine, which reflects the popularity of different assets. In the long run, it’s a weighing machine, which indicates the value of assets.

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Source: http://humblestudentofthemarkets.blogspot.com/2025/08/to-tariff-or-not-to-tariff-that-is-not.html

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