32 More Thoughts on Tariffs
Penguins, fictional economists, & more
If you haven’t read our initial 31 Thoughts on Tariffs, I’d check those out first.
These tariffs are not based on the tariffs other countries charge us. They’re roughly based on our trade deficit with a country, but they added a few extra parameters to the formula to make it seem more complicated.
However, it turns out they didn’t apply the extra parameters in their formula correctly, and that made the tariffs 4x higher than they should have been (AEI with the full details):
Correcting the Trump Administration’s error would reduce the tariffs assumed to be applied by each country to the United States to about a fourth of their stated level, and as a result, cut the tariffs announced by President Trump on Wednesday by the same fraction, subject to the 10 percent tariff floor. As shown in Table 1, the tariff rate would not exceed 14 percent for any country. For all but a few countries, the tariff would be exactly 10 percent, the floor imposed by the Trump Administration.
White House advisers are trying to wash their hands of the formula. The one the president chose is assumed to have been developed by Peter Navarro.
Peter Navarro is a Harvard-trained economist with views on trade that go “against a strong professional consensus.”
Peter Navarro also has a history of citing a fictional economist named Ron Vara (an anagram of “Navarro”) in his books.
We now impose tariffs on the McDonald Islands, which are only inhabited by penguins. We also accused those penguins of levying a 10% tariff on the U.S.
Commerce Secretary Lutnick tried to explain this away by saying “if you leave anything off the list, the countries that try to basically arbitrage America go through those countries to us.” This doesn’t check out because 1) the McDonald Islands are an Australian territory and 2) you couldn’t ship products through the McDonald Islands because the penguins have yet to build a port.
We also slapped tariffs on the British Indian Ocean Territory, which contains nothing but the Diego Garcia U.S. military base.
Different members of the administration are giving very different messages. Treasury Secretary Scott Bessent suggests the tariffs are for negotiations. Peter Navarro is adamant that these are permanent. Lutnick’s messaging suggests both, or maybe neither, and “executives have come away from meetings with the commerce secretary confused and exasperated.”
Don’t be surprised if Lutnick is the first cabinet member to be fired.
When asked directly, President Trump said, “There can be permanent tariffs, and there can also be negotiations.”
Elon Musk has broken with the administration on tariffs, voicing pretty strong opposition.
It’s clear that markets prefer the “negotiate trade deals” option over the “keep these in place permanently” one. The White House has made several announcements about negotiations today, and markets were green as a result.
We say “were” because the administration just announced that an additional 104% tariff is being implemented immediately on China, and that has sent markets reeling—can’t even begin to guess how they’ll look by the time you read this.
It’s also clear that President Trump thinks trade deficits are bad, and his only (or at least primary) goal is to eliminate them. That’s why he said that Vietnam and the EU reducing their tariffs on the U.S. to 0% is not good enough.
If his goal was instead to bring back manufacturing, he wouldn’t be trying to dismantle the CHIPS Act, which caused the largest spike in domestic manufacturing construction in U.S. history.
Regardless, we find the argument that tariffs will not reduce our trade deficits compelling.
On Monday, CNBC reported that Trump was considering a 90 day pause (based on a tweet from an anonymous account), causing a 7% spike in the S&P 500. When the White House denied the rumor, markets fell back to their original level.
It will be difficult, bordering on impossible, for businesses to make long-term investments in this environment. This imperils the $2 trillion of domestic investment that’s been pledged since January.
Broadly, tariffs are bad for construction because they raise input costs and can push investment to other countries. Research has found that manufacturing jobs created by tariffs destroy even more jobs in downstream industries like construction.
This is particularly frustrating because average construction wages are about 5% higher than average manufacturing wages.
Average manufacturing wages are also below what an assistant food service manager at Buc-ee’s earns (which may say more about Buc-ee’s than manufacturing, but still).
The cost for Apple to import an iPhone will rise from $550 to $850, and that’s with 54% tariffs on China, not 104%+.
As a result, it’s estimated that iPhones would cost 60% more in the U.S. than in Canada. Expect arbitrage.
Joe Lonsdale, a big time VC, says his bio manufacturing operations face tariffs on their inputs, while the finished products of their foreign competitors are exempt from tariffs.
Harkla, a company that makes products for kids with special needs, will see per order tariffs increase from $4,707 to $101,673, and that’s before the additional 50% increase on Chinese tariffs.
Mr. Beast, a gazillionaire Youtuber, says the tariffs have made it cheaper to manufacture his chocolate bars outside of the U.S.
Making it more expensive to import inputs is a good way to drive manufacturing to other countries.
The odds of a recession in the next 12 month are now above 60%.
Tariffs aren’t bad for everyone—“In the first quarter of 2025, 162 new lobbying registrations were filed that listed trade or tariffs among their concerns…more than twice as much as last year and a 48% increase over former President Joe Biden’s first year.”
But they are bad for the U.S. mining industry.
Tariff announcements have caused the price of oil to plunge. Somewhat ironically, this is a brutal blow to Russia’s economy.
What’s Next
Who knows? But whatever it is, we’ll cover it in Friday’s Week in Review post. That’s only for paying subscribers. If that’s not you and you want it to be, just click the button below.