The Future Path of Tariff Negotiations

The Future Path of Tariff Negotiations

The jig is up.

While President Donald Trump's tariff announcements have roiled international markets, we know what happens next.

Tariffs are bad for the economy. There's no way around it. And there's really no way that all of Trump's threats will come to fruition.

Most of the time, we distrust the forecasts of egghead economists who never seem to get it right. But in this case, they virtually all agree that Trump's tariffs are nonsense – and they are right.

While it would be nice to tax foreign imports, generate cash, and strengthen our own industry, it just doesn't work that way. You have to think of the second-order effects...

For instance, in 2018, during his first term, Trump instituted tariffs on foreign steel to protect blue-collar jobs at home.

A study published by the Federal Reserve estimated that steel producers gained about 1,000 new jobs. However, this caused input costs for U.S. industries that use steel, such as the automotive industry, to rise. Overall, it amounted to about 75,000 fewer manufacturing jobs.

Trade protectionism doesn't grow wealth. It destroys it. Free trade is what builds stronger, richer economies.

We think most of our readers appreciate the value of free trade.

So why doesn't Trump?

Well, there are a few theories for what may be going on in Trump's mind...

First, he could actually believe that tariffs will create wealth for Americans.

Of course, he'd be going against the consensus and the evidence of prior tariff regimes. Moreover, CEOs, political advisers, and bankers, when given an audience with the president, have all said something along the lines of, "Don't do this."

So, we don't think he's confused on the effect of tariffs.

Another theory would be that he wants more control over the economy...

While free trade creates the most wealth, a government can't direct where that wealth goes.

However, by instituting tariffs on certain imports, the government could have more control over the winners and losers.

There's also the theory that Trump simply believes that the economic cost of tariffs is worth other noneconomic benefits, like strengthening our national security or meeting certain political agendas.

Or perhaps there's another option altogether...

The final theory would be that Trump knows that imposing tariffs would be bad for the economy... but that the absurdity of the threat is what gives him leverage to extract other concessions from our trading partners.

This is called the "madman theory."

The term was coined by President Richard Nixon in the 1960s, though the idea can be traced all the way back to 16th-century political theorist Niccolo Machiavelli.

Essentially, in international relations, you have to appear crazy and highly volatile... willing to do anything. This instills fear in your enemies and gives you bargaining power.

As Nixon reportedly told his chief of staff, Bob Haldeman, during the Vietnam War in 1968...

I want the North Vietnamese to believe I've reached the point where I might do anything to stop the war. We'll just slip the word to them that, "for God's sake, you know Nixon is obsessed about communism. We can't restrain him when he's angry – and he has his hand on the nuclear button" and Ho Chi Minh himself will be in Paris in two days begging for peace.

There have been clear signs that Trump has followed the madman theory over the years...

Way back in 2015, referencing a quote from one businessman, he said, "There's a certain unpredictability about Trump that's great."

Later on in his 2016 campaign, he said, "We must as a nation be more unpredictable."

In 2018, when speaking about his negotiations with North Korea's Kim Jong Un, Trump said, "I would not rule out direct talks with Kim Jong Un... As far as the risk of dealing with a madman is concerned, that's his problem, not mine."

Now, Trump hasn't explicitly said the tariffs are only a threat. If he did, he'd lose the power of the threat.

But everything Trump has done so far suggests that he's using tariffs as the metaphorical stick to get trade concessions, rather than the usual method of offering carrots...

Take the announcement of 25% tariffs on Canada and Mexico – our closest trading partners and allies. Trump gave these countries an easy out if they agreed to take action against drug trafficking and illegal immigration. (And though the president did recently say tariffs scheduled to hit Canada and Mexico next month are "going forward on time," this is probably a bluff.)

The point here is that markets have feared disruptive tariffs – and for good reason.

But we don't view them as an inevitability that will doom us to a recession or send the markets spiraling.

It's clear to us that Trump would prefer to pry other deals from our trading partners and not institute huge tariffs across the board. So for now, we'll just have to wait and see whether Trump's bargaining tactics pay off.

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Here's to our health, wealth, and a great retirement,

Dr. David Eifrig and the Health & Wealth Bulletin Research Team
February 26, 2025