Tariffs: The Illusion of a Quick Fix in a Complex Global Economy
.png?width=780&height=244&name=header%20for%20blog%20(9).png)
Tariffs are one of those ideas that sound simple enough on paper: we tax imported stuff... that makes domestic products more attractive... and presto! — more jobs, less trade deficit, stronger economy. But as with most things in economics, the surface-level logic rarely survives contact with the nuanced and messy reality.
So let's get into what tariffs really are, what they actually do, and who pays the price.
What Tariffs Are Supposed to Do (...but don’t)
A tariff is basically a tax on goods coming into the country. So if you slap a tariff on steel from China or electronics from Japan, you’re making those products more expensive in the hope people will buy American instead.
The goal here is to intentionally advantage domestic manufacturers (which hopefully trickles down to narrowing our overall trade gap).
But (and you're probably ready for this one), that's not really how things usually turn out.
Tariffs might change where we buy things from, but they don’t necessarily change how much we buy. Instead of sourcing from China, companies might just shift their sourcing to Thailand or Mexico — and consumers still end up paying more.
Or, in cases where we simply cannot import that specific good or commodity from someone else, we just eat that price differential as U.S. consumers.
Meanwhile, the trade deficit? Still there. Because this isn't just a trade problem — it’s a savings and investment problem. You can’t tariff your way into producing more semiconductors or growing more coffee beans. And you definitely can’t tariff your way into macroeconomic balance.
For a boatload of these industries, rebalancing global trade would require massive, coordinated investments that take decades to bear fruit.
If you want to create all the best CPU or GPU chips here in the U.S., you have to build an army of multi-billion dollar fabrication facilities across years to make a dent in that.
To wit — Taiwan Semiconductor Manufacturing Company (TSMC) produces more than 60% of the world's semiconductor chips and 90% of advanced chips... most of which are manufactured in Taiwan. You can't just replace that by making them more expensive here. And even if you *could* shift that production capacity onshore, it might still cost more than the foreign-made parts + tariffs given how expensive it is to manufacture a lot of goods here.
Another note along these lines — most American companies don’t make everything from scratch even if they are "American" companies. Think about a car manufacturer. Yes, the giant assembly lines in Detroit produce a ton of cars... but many of the parts required to *make* those cars are imported. So while we're still "making" the cars here, the cost invariably now goes up because all the component parts are now more expensive too. You're taking a bite out of their margins, and those higher costs? Yep, they get passed on to the rest of us.
Who Actually Pays Tariffs? (Spoiler: It’s Not the Foreign Governments)
Before we go any further, it's worth clearing up how tariffs are levied. When the U.S. imposes a tariff on imports, it’s not the foreign government or exporter who foots the bill — it’s the U.S.-based company doing the importing. That cost gets baked into the price of the product when it hits the shelves.
So if a retailer brings in furniture from China and there’s a 25% tariff slapped on it, the importer pays that extra cost up front. And because no business wants to eat that loss, they pass it down the line — to distributors, retailers, and eventually to you and me, the consumers.
To repeat: tariffs are taxes on us, not them.
And again, for a lot of these industries, the U.S. has little to no domestic production capacity. We can't just magically mine more rare earth metals to build new-age batteries... those deposits don't exist here.
We can't sew an $8 t-shirt here given minimum wage laws, child labor laws, etc. So if consumers are used to paying that little for a shirt, they may just go without instead of buying "American made."
The Domino Effect: Retaliation, Costs, and Confusion
Now we get to retaliation... Countries don’t just sit on their hands — they hit back. China, the EU, and others have responded to U.S. tariffs with taxes of their own, often targeting politically sensitive exports (aka, soybeans, sorghum, etc.). So now you’ve got farmers, manufacturers, and small businesses caught in the crossfire.
China’s Not Losing Sleep Over This
One of the weirder twists in this whole trade war story is that it might actually be helping China in the long run... not hurting them.
During the first Trump administration, China realized how precarious the global trade world order could be with an unpredictable U.S. President at the wheel. So China spent years building up its manufacturing dominance — not just as a cheap labor hub, but as a critical supplier for global supply chains. Rare earths, electronics, components for EVs, solar panels... if the world builds it, there’s a good chance China makes part (or nearly all) of it. That means they have more leverage in this fight than we do. As The Atlantic pointed out, they’ve got “escalation dominance:”
“Chinese businesses will be hurt by losing access to the American market, but that is an easier problem to solve. China can redirect some of its exports to countries in Europe and East Asia, whose citizens also need phones, toys, and toasters. Beijing could also give money to its own citizens to create more demand for its products at home and provide subsidies to its businesses to help them remain solvent. This asymmetry gives China what the economist Adam Posen calls “escalation dominance”: the ability to inflict disproportionate harm on its economic enemy.”
To give another high-profile example of China’s superior leverage in a trade war with the U.S., see Tim Cook — CEO of Apple:
“There’s a confusion about China, and let me at least give you my opinion. The popular conception is that companies come to China because of low labor cost... I’m not sure what part of China they go to, but the truth is China stopped being the low labor cost country many years ago.
“The reason is because of the skill, the quantity of skill in one location and the type of skill it is... The products we [build] require really advanced tooling and the precision that you have to have in tooling and working with the materials that we do are state of the art... And the tooling skill is very deep here.
"In the US, you could have a meeting of tooling engineers and I’m not sure we could fill [this] room. In China you could fill multiple football fields... It’s that vocational, vocational expertise is very deep, very, very deep here.”
President Trump loves to point out the trade imbalance between the two counties, but the fact of the matter is that the things China imports from us (like soybeans, sorghum, etc.), they can find other suppliers for... whereas many of the more high-ticket items like rare earth metals... really only exist in China. They have a lot more leverage in a 1v1 trade war with us because there are more alternate suppliers of what they get from us, and more markets for them to export their goods to.
So while U.S. tariffs are meant to slow down China’s rise, they’ve arguably accelerated Beijing’s push to become both more self-reliant and more globally integrated — especially with countries in the Global South and parts of Europe that are tired of the economic crossfire.
Big Picture: Tariffs Are a Bandaid, Not a Cure
Yes, tariffs could maybe help certain domestic industries in the short term. But they don’t fix what’s broken — they paper over it at best, while delivering a lot of pain in the meantime.
The trade deficit? That’s about how we save, spend, and invest as a country. Supply chains? Those are built across decades and aren’t easily rerouted with the flick of a policy switch. Innovation? It’s not going to thrive in an environment focused on defensive economic maneuvering.
Bottom line: tariffs can be a compelling political talking point, but they’re usually a shaky economic strategy. If we’re serious about competing globally, we’ve got to stop trying to tax our way out of complexity — and start building smarter, investing deeper, and partnering better.
Want to discuss how global trade tensions could affect your investments or portfolio? You know where to find us.
IMPORTANT DISCLOSURES
The information contained in this communication has been designed for general informational, illustrative, and educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any security. Moreover, the information provided is not intended to provide any investment advice whatsoever. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product, or any non-investment related content, made reference to directly or indirectly in this communication will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. No discussion or information contained herein serves as the provision of, or as a substitute for, personalized investment advice. To the extent that a reader has any questions regarding the applicability above to his/her individual situation of any specific issue discussed, he/she is encouraged to consult with the professional advisor of his/her choosing. City Different Investments is neither a law firm nor a certified public accounting firm and no portion of this content should be construed as legal, tax, or accounting advice.
The presented information and statistics have been obtained from sources we believe to be reliable but cannot be guaranteed. Any projections, market outlooks or forecasts discussed herein are forward-looking statements and are based upon certain assumptions. Other events that were not taken into account may occur and may significantly affect the returns or performance of these investments. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice. Please keep in mind that past performance may not be indicative of future results.