On “Liberation Day,” Trump announced a sweeping new tariff program targeting all U.S. trading partners. Tariffs are essentially taxes on imported goods. While the importer—often a foreign manufacturer or a U.S.-based distributor—pays the tariff upfront, the cost is typically passed along the supply chain and ultimately borne by the consumer. The price of the imported product rises by the amount of the tariff, much like how sales tax is added at checkout.
This is always the case in the U.S.—a product may be priced at $9.99, but a $10 bill won’t cover it at the register. You’ll be charged $9.99 plus tax. Tariffs function the same way: the “plus tax” becomes a built-in addition to the price. It raises the total cost, making tariffs inflationary by nature. There’s no ambiguity—tariffs increase prices for American consumers.
Another key issue is the potential reaction from foreign markets. If foreign countries respond to “Liberation Day” by imposing retaliatory tariffs on U.S. goods exported to their markets, demand for American products in those countries is likely to decline. As a result, the primary loser will be the American manufacturer. Although the tariffs might raise the price of their goods in foreign markets, the manufacturer won't benefit from this price increase. Instead, they will be left with unsold inventory piling up.
This surplus will force the manufacturer to reduce production, which may lead to layoffs and even factory closures. As sales drop and costs rise, the company will face growing financial losses. The ripple effect of these tariff wars could hurt not just the manufacturers, but also their employees and the broader U.S. economy. The intended benefit of higher prices for American goods could backfire, harming domestic producers instead of helping them.
In conclusion, if a tariff war isn't resolved quickly through negotiations, it could lead to a global economic downturn. The key argument behind Trump's "Liberation Day" was that countries with a trade surplus with the U.S. would be motivated to resolve the tariff dispute by agreeing to reduce their tariffs on U.S. goods in exchange for a reduction in tariffs on their exports to the U.S. This was the strategy Trump relied on when he announced "Liberation Day."
Since most major economies have significant trade surpluses with the U.S., they stand to lose more in a prolonged trade war than the U.S. does. As a result, these countries would likely be more willing to make concessions and settle the conflict quickly to avoid greater economic damage to their own economies. Ultimately, they would have a strong incentive to negotiate before the costs to their economies exceed those faced by the U.S.
One error the Trump administration made in its calculation of how much tariff each foreign country charges the U.S. was including the Value Added Tax (VAT) in the tariff amount for U.S. goods. This is a misunderstanding of how VAT works. VAT is a consumption tax that applies equally to both domestic and imported goods in most countries. It is designed to be a tax on consumption, not a tariff, and the rate is the same for domestic products and imports.
When calculating the true cost of tariffs on U.S. goods, VAT should not be factored in because it does not create an unfair competitive disadvantage for U.S.-made products. Both, imports and domestic products, face the same VAT rate, which raises their prices equally. As a result, VAT does not distort the market by making foreign goods more expensive than local products. Therefore, including VAT in the tariff calculation gives an inaccurate picture of the actual trade imbalance and the costs imposed by tariffs.
This miscalculation could lead to misguided policies that unnecessarily exacerbate trade tensions. I suspect that the reason the U.S. imposed a 17% tariff on Israeli goods, despite Israel reducing their tariffs on U.S. goods to zero, was due to Israel’s 17% VAT, which is applied to all products and services—whether imported or domestically produced—bought and sold within the Jewish State.
Clearly, this was a result of a misunderstanding. I can only hope, that Netanyahu clarified this point with Trump during their latest meeting at the White House. Understanding the distinction between tariffs and consumption taxes, like VAT, is crucial for crafting effective and fair trade policies. It ensures that the intended issues are addressed without unnecessarily complicating or distorting the global marketplace.
The 90-day hiatus in imposing the tariffs, except on China, will give Israel more time to correct the situation.
Concerning the case of China, let's begin by acknowledging that the U.S. was right to resist China's demands to cancel the new tariffs, as well as the Chinese response of retaliating with their own tariffs on U.S. goods.
China has, for many years, been taking advantage of the U.S. in the global trade system. It’s well-documented that China has imposed high tariffs and a range of other trade restrictions on American products. These measures weren’t just unfair; they were damaging to U.S. interests.
For a long time, the U.S. allowed this situation to persist. Why? Primarily due to fear of the consequences a trade war might have on the U.S. economy. The potential for a slowdown in growth, higher prices for consumers, and a hit to the stock market were all concerns that kept U.S. policymakers from taking more decisive action. But the reality is that these imbalances in trade couldn’t go on forever.
Now, we find ourselves in a situation where the trade war between the U.S. and China has escalated. It’s important to recognize that this escalation is, in some ways, like two poker players engaged in a high-stakes game. Each one raises their bet, trying to outplay the other, each attempting to project strength. But here’s the key: as the game goes on, one of the players, who has more to lose, will eventually fold. In this analogy, China is the player with more to lose.
Why? Because the U.S. has a massive trade deficit with China. Simply put, the U.S. imports far more from China than it exports to them. This creates an economic imbalance, and as the tariffs continue, the impact on China will be far more painful than on the U.S. The Chinese economy is heavily dependent on its exports, particularly to the U.S. If those exports are hindered by tariffs, China faces greater economic strain.
On the other hand, while the U.S. economy will certainly feel the effects of tariffs, especially in the short term, the longer-term consequences are less severe for the U.S. compared to China. Eventually, China will have to “blink” – they will have to make a concession and come to the negotiating table before the U.S. does. The economic pressure on China is simply too great for them to hold out indefinitely.
In conclusion, while the current trade war may escalate in the short term, the fundamental economic dynamics give the U.S. an advantage. China’s dependence on trade with the U.S. and the trade deficit it faces make it more vulnerable to the economic consequences of this conflict. As the trade war drags on, it’s China that will ultimately be forced to make the first move toward resolution.