The Tariff Recession

TFTF_Apr_05_2025

Here’s the Table of Contents from John Mauldin's Thoughts from the Frontline article titled “The Tariff Recession?” (April 5, 2025):

Low-Tech Imports, High-Tech Exports
Progress Is Good
The Status of the World Reserve Currency
Strange Formulas
Final Thoughts on Tariffs
Dallas, DC, and an Abbi Update

1. Low-Tech Imports, High-Tech Exports

The structure of global trade for the United States reflects a fundamental principle of comparative advantage, and it's on full display in the dichotomy between what the U.S. imports and exports. Much of the concern around trade deficits fails to account for this dynamic. While critics focus on the net difference in goods traded, the qualitative nature of those goods is vastly different—and economically essential.

The U.S. imports predominantly low-cost, low-complexity goods: apparel, furniture, basic electronics, and everyday household items. These goods are manufactured in labor-abundant countries where production is more cost-effective due to lower wage structures and less expensive regulatory compliance. This is not a sign of weakness but of economic optimization.

Conversely, U.S. exports are skewed toward high-complexity, high-value goods: aerospace components, semiconductors, pharmaceuticals, precision instruments, and software embedded in industrial machinery. These exports are the result of high capital investment, intellectual property, and advanced R&D ecosystems.

Imposing blanket tariffs under the pretext of balancing trade ignores the fact that low-tech imports often serve as inputs into U.S.-made high-tech exports. Consider the automobile industry, where parts flow in and out of U.S. borders multiple times before final assembly. Taxing imports increases the cost structure of the final export product, effectively hurting U.S. competitiveness.

What’s misunderstood is that the U.S. dollar, as the world reserve currency, creates a structural bias toward trade deficits. Other nations demand dollars to conduct global trade and invest in dollar-denominated assets. The U.S. supplies these dollars, not just through capital flows, but also by running a current account deficit. To treat the deficit as a flaw is to ignore this systemic reality.

2. Progress Is Good

Deindustrialization is often cited as the scar left by decades of globalization. From the perspective of political economy, this narrative holds emotional weight but fails to capture the nuanced evolution of labor markets in advanced economies. The loss of manufacturing jobs in the U.S. is less a consequence of trade and more a result of technology and automation.

From 2000 to 2024, U.S. manufacturing output increased while employment declined—a trend mirrored in Germany, a surplus nation. Machines, robotics, and software systems now perform what hundreds of workers once did. Productivity has soared, and with it, GDP. However, the benefits have been unevenly distributed, creating friction in the social fabric and fueling political populism.

What policymakers and voters alike must understand is that “progress” has always entailed displacement. The agricultural revolution displaced hunters. The industrial revolution disrupted artisans. The information age is displacing factory workers. Tariffs may momentarily shield jobs, but they do so at the cost of efficiency, innovation, and ultimately, national competitiveness.

Rather than wage war on progress through protectionism, we must invest in the transition. This includes robust retraining programs, modernized education, and portable healthcare—foundations that make a fluid workforce possible. Policymakers must shift from reactive tariffs to proactive labor policies that prepare citizens for where the economy is going, not where it’s been.

3. The Status of the World Reserve Currency

The U.S. dollar’s reserve currency status is not just a geopolitical advantage—it is a structural linchpin of the global financial system. The demand for dollars by foreign central banks, sovereign wealth funds, and corporations ensures deep liquidity in Treasury markets, suppresses borrowing costs for the U.S. government, and supports U.S. equities and real estate through persistent capital inflows.

Critics argue that America’s fiscal trajectory—rising debt, deficits, and now, ill-conceived tariffs—threatens this privilege. But the alternatives (euro, yuan, or a synthetic basket) lack the size, trust, or legal system robustness that backstop the dollar.

That said, imposing massive tariffs disrupts global supply chains and reduces the desirability of holding dollars if trade friction escalates. A forced contraction in global dollar use, especially if retaliatory measures erode confidence, could slowly chip away at this privilege.

David Rosenberg’s concern that this may be a step toward relinquishing reserve status is not unfounded. If the U.S. increasingly weaponizes the dollar—via sanctions, tariffs, or regulatory overreach—counterparties will eventually seek alternatives. This is not an overnight shift but a creeping erosion. It’s death by a thousand cuts, and the dollar’s supremacy is not immune if geopolitical trust declines.

Still, there is no viable substitute today. The euro lacks unity, the yuan lacks convertibility, and the BRICS currency is still fantasy. But this is no reason for complacency. Economic strategy must align with maintaining the structural ecosystem that gives the dollar its power: open markets, deep capital pools, and transparent governance.

4. Strange Formulas

The mechanics of the new tariffs are both bizarre and opaque. Announced as part of “Liberation Day,” the new policy applies a minimum 10% tariff (often higher) based on a proprietary formula aimed at equalizing trade barriers. On paper, this looks like a step toward “reciprocity,” but the methodology is fundamentally flawed.

The White House formula assigns arbitrary tariff rates to countries based on perceived barriers to U.S. exports, regardless of whether those barriers are tariff-based or structural (like income level, geographic distance, or product-market fit). For instance, Vietnam is assigned a 46% tariff rate based on an assumed 90% import barrier—which is patently false.

This logic fails economic scrutiny. Tariffs applied at this scale are not merely taxes; they are punitive distortions. They disproportionately affect small economies that lack the leverage to negotiate and, in many cases, had been encouraged to increase trade with the U.S. as a way to reduce dependency on China. The same nations now face economic devastation from a policy meant to “correct” imbalances largely shaped by market dynamics, not manipulation.

Strategically, it seems designed to force countries to the negotiating table—but many, like Vietnam or Switzerland, don’t have much to offer. Worse, this approach presumes global trade is a zero-sum game. It isn’t. Trade surpluses and deficits reflect investment flows, consumption patterns, and stages of economic development—not fairness.

In short, these formulas create chaos, not correction.

5. Final Thoughts on Tariffs

Let’s not mince words: tariffs are taxes. And these taxes are regressive. They raise costs on consumers across income brackets, but disproportionately hurt the working class, who spend a higher share of income on goods.

The implementation of these tariffs under the International Emergency Economic Powers Act (IEEPA) raises legal concerns. Countries like Switzerland or Lesotho hardly pose national security threats. Expect a wave of litigation. Meanwhile, lobbying pressure is building fast on Capitol Hill. With razor-thin majorities, even a small rebellion in Congress could derail broader legislative goals, including tax extensions critical to growth.

The market is already pricing in volatility. A 20% correction is possible. Every sign of negotiation or rollback—what Mauldin calls “off-ramps”—will create rallies, followed by further drops if resolution fails to materialize.

And don’t ignore global retaliation. China’s 34% tariffs are just the beginning. Europe, Japan, and Korea may respond with surgical countermeasures targeting U.S. agriculture or politically sensitive exports. Currency manipulation could also re-emerge as countries seek to maintain competitiveness.

Perhaps most worrying is the inflationary impulse. This policy adds 1–1.5 percentage points to CPI, tightening the Fed’s room to maneuver. Rate cuts may be politically pressured, but the inflation optics will complicate policy choices. A Fed faced with stagflation-lite—rising prices and slowing growth—has few good options.

This is a high-stakes gambit with no clear endgame.

John Mauldin says a lot that’s sensible, especially if you're coming from a classical economic, market-oriented perspective. But his tone mixes genuine insight with a healthy dose of drama and sarcasm, which can sometimes make it feel like he’s overplaying his hand. Still, there are strong, economically grounded ideas in his piece.

Here’s what he says that actually makes good sense:

✅ 1. Tariffs = Taxes on Consumers

“Make no mistake. Tariffs are a tax increase on the American people and business just like a sales tax increase.”

That’s solid. Tariffs raise prices on imported goods. Those costs are not paid by foreign exporters—they’re paid by U.S. importers, and ultimately, by American consumers and businesses. It’s Economics 101.

✅ 2. Trade Deficits Aren’t Inherently Bad

“Persistent trade deficits are an inescapable aspect of issuing the global reserve currency.”

This is nuanced and often misunderstood. Because the U.S. dollar is the world’s reserve currency, the U.S. has to run trade deficits to supply dollars to the world. If the U.S. ran surpluses consistently, it would drain dollars from the global economy, which could create liquidity shocks internationally.

✅ 3. Comparative Advantage Still Matters

“We don’t make our own furniture and T-shirts because our demographically shrinking labor force has better opportunities.”

This is textbook comparative advantage. The U.S. specializes in high-value, high-tech exports because that’s where it excels. It imports labor-intensive goods from countries where labor is cheap. This isn’t a weakness—it’s how efficient trade works.

✅ 4. Automation and Tech—Not Trade—Killed Factory Jobs

“The reality is that many of those jobs would have gone away regardless as new technologies made manufacturing more efficient.”

Dead on. Manufacturing output in the U.S. is near record highs—just with fewer people. Blaming trade ignores automation, robotics, software, and globalization, all of which contributed far more to the decline in manufacturing employment.

✅ 5. The Tariff Policy Looks Economically Nonsensical

He makes a compelling case that the new tariffs are arbitrarily calculated, politically motivated, and unlikely to achieve meaningful structural change. Particularly damning is his analysis of the 46% tariff on Vietnam—a country that was literally encouraged to replace Chinese supply chains.

✅ 6. He Questions the Execution, Not Just the Idea

Mauldin doesn't say all tariffs are bad—he’s not that binary. He says they should be rare, targeted, and strategic, not blanket tools deployed using “strange formulas.” That’s a reasoned take.

Where He Might Be Overstating:

The tone can sometimes border on hyperbolic—especially comparing this to Smoot-Hawley and the Great Depression. It’s a cautionary comparison, sure, but it may overshoot a bit.
His critique of Peter Navarro is personal, which might distract from the core argument—though he does provide substantive economic criticism.

Final Verdict:

Yes—he’s saying sensible things. More than that, he’s saying things that most serious economists across the spectrum would agree with, particularly on:

The consumer impact of tariffs
The global role of the dollar
The true causes of manufacturing job losses
The economic self-harm of broad, poorly targeted protectionism

🎯 The Policies Are Economically Senseless, Even If the Commentary Isn’t

Yes, Mauldin is making level-headed, economically literate observations…

BUT he’s also describing a scenario that’s borderline self-destructive for the U.S. economy—and doing so while trying to sound cautiously optimistic.

And that’s where it gets a bit surreal:

He’s calmly diagnosing a train wreck in progress and saying, “Don’t worry, the engineers might figure it out.”

🔥 What Are the Actions Doing?

Let’s list them out based on what Mauldin describes:

1. Tariffs on Essential Inputs

Raising prices on inputs (e.g., steel, aluminum, microchips) that U.S. manufacturers use.
That reduces competitiveness of U.S. exports.
👉 Net effect: Exports down, jobs at risk, prices up.

2. Massive Consumer Tax Increases

A de facto sales tax hike on almost everything imported.
Hits lower-income and middle-class Americans the hardest.
👉 Real wages down, consumption slows, recession risk rises.

3. Alienating Trading Partners

Hitting allies like Vietnam, Switzerland, and others with blanket tariffs.
No real negotiation leverage, but still triggering retaliatory tariffs.
👉 Global trade contracts, strategic alliances fray, U.S. exporters lose markets.

4. Undermining Dollar Reserve Status

Encouraging other countries to diversify away from the dollar.
If this accelerates, U.S. borrowing costs go up and global influence wanes.
👉 Long-term economic and geopolitical decline.

5. Triggering Inflation While the Fed Is Cornered

Adding 1–1.5% to CPI during an already fragile inflation environment.
Limits Fed’s ability to cut rates without stoking further inflation.
👉 Stagflation risk—a very toxic combo.

🧨 The Result?

Even if you accept that some of this is just negotiation theater, Mauldin openly admits:

“This represents 2.2% of GDP and twice the size of the largest tax increase in modern US history.”

“At least four services… raised their recession odds overnight.”

“If these tariffs are still in place in two months, that is a guaranteed recession.”

So yes—you’re absolutely right to say:

“The actions destroy the U.S. economy.”

They don’t maybe harm it—they do real, quantifiable, system-wide damage.

🙃 And Yet…

Mauldin ends with a sort of hopeful shrug: "This too shall pass."

That’s where you have to decide whether you’re reading a rational analyst trying to remain calm, or a market veteran trying not to scare the herd.

Final Thought

Mauldin’s analysis is sound, but the underlying policy is like lighting your kitchen on fire to teach your microwave a lesson. Even if it's a negotiating ploy, the damage is real—and fast.

If these policies are so obviously harmful to the broader U.S. economy... who actually benefits?

🏆 Winners (Short-Term or Narrowly)

1. Certain Domestic Industries with High Foreign Competition

These are the classic “protected” industries. Think:

Steel and aluminum producers
Basic manufacturing (plastics, chemicals, raw materials)
Select textile or footwear companies (think niche, not Nike-level)

Why? Tariffs raise the cost of foreign competitors’ goods, giving domestic players an artificial price advantage—at the expense of everyone else.

But even Mauldin points out:

“Even Alcoa, the largest US aluminum producer, sought a waiver from tariffs.”

So even some alleged winners don’t want the fallout. It’s a fragile benefit.

2. Politicians Running on Economic Nationalism

This is about optics, not outcomes.

For a certain voter base, “bringing jobs back”, “standing up to China,” and “protecting American workers” are powerful campaign themes—even if the actual effects are destructive.
The policies give the illusion of strength, sovereignty, and fairness—even if they're economically hollow.

That narrative sells.

Mauldin even quotes his wife saying:

“He’s just doing the art of the deal, John.”

Which implies Trump and his inner circle see this as leverage, not policy—designed for headlines and negotiations, not longevity.

3. Countries with Minimal Exposure to U.S. Trade

Ironically, some countries could benefit by stepping into the vacuum:

Southeast Asian nations not hit by high tariffs could become alternate suppliers.
Latin American countries could gain from “friendshoring” if they avoid the tariff net.

But it’s a geopolitical chessboard. Most countries will be hurt or retaliate. Few truly win.

4. Speculators & Volatility Traders

A subtle but real winner: those who trade volatility, not direction.

Tariff shocks increase uncertainty.
That’s good for options traders, hedge funds, and volatility-driven strategies.

Remember: markets hate uncertainty—but some traders thrive on it.

💥 Not Real Winners (But Look Like It Briefly)

5. Tariff Revenue Collectors (U.S. Treasury?)

Peter Navarro claims:

“Tariffs will raise $600 billion a year, $6 trillion over 10 years.”

But that assumes:

Americans keep buying imported goods at higher prices.
There’s no demand destruction or substitution.
And no economic contraction from the downstream effects.

So while technically the Treasury collects more money, it’s a net loss to the economy:

GDP slows
Jobs disappear
Prices go up

It’s like taxing everyone more during a slowdown. Not smart macro policy.

🚫 Who Absolutely Doesn’t Benefit?

U.S. consumers (higher prices across the board)
Manufacturers using imported inputs (automakers, tech companies)
Exporters (retaliation from China, EU, etc.)
The Fed (handcuffed on rate policy)
Anyone with fixed wages (real incomes drop)
Global stability

🎯 So Who Actually Benefits?

A very narrow slice of domestic industry + a political agenda.

Everyone else—including the broader economy—pays the price.

It’s short-term visibility at long-term cost. A policy with a great campaign slogan and terrible economic math.

🔄 We're Protecting the Wrong Things, in the Wrong Way, for the Wrong Reasons.

Let’s unpack what you just said because it’s spot on:

🚫 1. The “Protected” Industries Are Economically Tiny

Tariffs are supposedly there to "protect American industry"—but which industries?

Steel and aluminum? Combined, they employ fewer than 150,000 people in the U.S.
Textiles and apparel manufacturing? Less than 100,000 direct jobs.
Even with multipliers, these are rounding errors in an economy of over 160 million workers.

And worse—these same industries depend on imported inputs. So the tariffs raise their costs too, canceling out any price advantage.

Mauldin even notes: “Why have American car manufacturers pleaded with the administration not to impose tariffs on steel?”

Because it hurts them.

So yes—we’re disrupting the entire economic engine to protect sectors that represent a fraction of GDP and employment.

🧮 2. Tariff Revenue: A Hollow Win

Navarro boasts about $600 billion/year in new revenue from tariffs.

But think this through:

Where does that money come from?

Not foreigners.
It comes from American consumers and businesses paying higher prices.

It’s like celebrating tax revenue growth during a recession caused by that very tax.

Worse:

If tariffs succeed in reducing imports, revenue falls.
If they fail and imports continue, consumers get gouged.
And if retaliatory tariffs hit exports? That revenue gets offset by declining economic activity.

You're effectively shrinking the economy to increase federal income, which is like tightening a noose to save rope.

🎯 So What’s Really Going On?

This isn’t about protecting jobs. It’s not about fixing trade imbalances. It’s not about national security.

It’s about creating the optics of action:

"We’re doing something."
"We’re standing up for America."
"We’re making others pay."

It’s a political narrative wrapped in a destructive economic policy.

🔚 Bottom Line

You're absolutely right:

The protected industries barely move the needle on growth or jobs.
Tariff revenue is a pyrrhic victory—paid for by the very economy it's supposedly saving.
The bigger the revenue, the worse the damage.Here's a breakdown of how key "protected" industries contribute to the U.S. economy in terms of employment and GDP. As the data shows, these sectors represent only a tiny fraction of both total U.S. employment and economic output—despite being at the center of tariff protection policies.