Tariff Q&A: Welcome to the Actual Inbox
a brief comprehensive guide that hopefully answers all your questions
We call a tariff a protective measure. It does protect; it protects the consumer very well against one thing. It protects the consumer against low prices. - Milton Friedman
Welcome to a new project! This is my version of AI - the Actual Inbox - but it’s a human answering questions from other humans! Ever since the release of my book In This Economy? I’ve gotten many, many questions about a lot of things, which has understandably increased over the last few months. My job is explaining stuff, and I try my best to cover as much as I can in short form videos, but I think it’s time to do a series of experimental biweekly Q&As to answer some of those questions (many of which are similar!). While I can’t get to them all, I hope it will help. This project takes inspiration from The Red Hand Files from Nick Cave: it’s personal, candid, and open to everyone (I highly recommend both listening to his music and reading his letters - both are beautiful beyond description). Feel free to submit your own economic or market question via this form. And if you want to support this project, please become a free or paid subscriber (and thanks to those who already are!). Thank you so much!
Now, let’s talk tariffs. President Trump’s newly announced tariffs are sparking all sorts of confusion, and rightfully so. Below, I’ll address some questions I’ve been asked over the past few days.
Oh, Tariffs
I am sure you have countless notes in your inboxes this morning talking about the tariffs announced by President Trump. The announcement was far more extreme than I think most people were imagining.1 The tariff situation seems to stem from:
A series of economic misunderstandings: What tariffs are, what trade deficits are, what reshoring US manufacturing actually means, etc
An ignorance of history: The last time we did mass tariffs was in 1828 and 1930 (Smoot-Hawley), and we faced a deepening depression after each one. McKinley, Trump’s #1 Tariff Inspiration, DID NOT like tariffs at the end of his time.
Many are trying to rationalize the tariffs by saying that
The sharp pain in the economy will be worth it.
That companies can find new raw materials and move their supply chains back to the US (the Dallas Fed manufacturing survey would disagree with that).
That these mass tariffs are just the US version of what Xi did to China a few years ago (unfortunately, these tariffs are not paired with any real investment or plan, other than punishment, at least at this point).
But overall, people are very worried!
It’s all complicated. As Barry Bannister of Stifel said on CNBC, this is pretty much a stagflationary shock but with a reason - Middle America has been hollowed out. Something like this was bound to happen eventually. People are frustrated, and it is because we have extreme wealth inequality. A lot of people are justifying the tariffs as a way to return wealth to the working class, but the way that these were rolled out, how sweeping they are, and how inflammatory any discussion around them is - it’s more likely to make things much harder. But… what happens next?
Q1: What is happening?? Are we cooked?
President Trump declared a “national emergency” over what he calls “large and persistent U.S. trade deficits.” The administration’s view is that the U.S. is losing jobs and money because of “unfair” trade. The White House says that adding tariffs will force companies to bring production back home, thereby boosting U.S. manufacturing and creating more jobs.
Tariffs are import taxes2. And most of the time, it’s not really the countries that pay for them, it’s companies (and then, usually consumers). As Kathy Jones said:
It is the companies importing the goods that pay the tariff. These then get passed along to consumers (as much as possible). It's not really a tariff on a country - it's a tax on the goods imported.
That’s important to remember here. China isn’t really paying the China tariffs, it’s companies that operate in China and send stuff to the States. There are two main layers to Trump’s new tariffs:
A 10% “baseline” tariff on most imported goods, effective April 5.
A set of “kind reciprocal” tariffs that vary country by country, targeting about 60 nations deemed “worst offenders” (including one nation with zero people in it!) These reciprocal rates kick in on April 9 (presumably to give room for some type of negotiation). So for example, China’s total tariff rate is effectively around 54% on top of older, existing tariffs. China has already retaliated with a 34% tariff on all US imports.
Canada and Mexico already face separate 25% tariffs over other disputes, though they’re technically not added onto the brand-new set. A lot of people have said things along the lines of “well, other countries tariff us, why shouldn’t we tariff them” - and this is an adjusted chart of the actual tariff rates countries charge to the US. It’s much lower than the White House stated. You can also see this in what we did to Japan.
So we aren’t necessarily cooked, but these tariffs represent a massive shift in trade policy (and wild economic calculations!) We could be staring at higher consumer costs, a potential trade war, and an economic slowdown, as I’ve written about previously.
Takeaway: Expect near-term turbulence in the form higher prices, possible retaliation from trading partners, and market volatility. We’re not doomed, but the road ahead is bumpy.
Q2: I live in Cleveland so the talk of bringing back manufacturing is great. But could these new tariffs really bring jobs, or is it all hype?
It’s complicated. Talmon Joseph Smith of the NYT has a great in-depth piece exploring the years of underinvestment in places like your home in Cleveland and my home in Kentucky. We need to reinvest in the manufacturing areas that got left behind, but we should dream bigger than making socks and toasters.
But why do we want to return? After WWII, the US dominated global manufacturing - we were one of the only large industrial bases not destroyed by war. But over decades, Europe and Asia rebuilt (and innovated). As a share of total employment, manufacturing in the US started steadily shrinking as we focused on other things. Many people see tariffs as a quick fix to revive factories here, but modern manufacturing is highly automated. There are a few things to consider:
Automation: Robots often do the bulk of the heavy lifting, even in lower-wage countries, which could mean fewer jobs per factory, because machines do much of the work.
Global supply chains: Companies might shift some operations to Mexico or into the US, but that’s expensive and may not create a big wave of new US jobs. It might be cheaper to just eat the tariff (translation: pass to consumer) and continue to produce abroad and just sell the US fewer sneakers at higher prices.
Competition: Countries like China aren’t just churning out cheap, low-skill products, they’re leaders in advanced manufacturing (e.g., robotics, electric vehicles, semiconductors). They already see automation as an advantage, not a job-killer, which is something the US has struggled with (the UAW opposing automation, for example). If we really want to produce good stuff here, we have to think to the future, not the past. Also foreign production should be thought as a complement to domestic production - it helps us make better things here to be able to rely on comparative advantage from abroad.
There’s also pure economics that complicate the reshoring argument - tariffs will slow down the economy, leading to less investment. Businesses don’t make as much money, so they don’t build as much. Also, the US is so uncertain now, that no one will want to invest here (and also all the rules might change again in the next election cycle).
Argentina fell into this trap under Peronism - it was one of the top 10 wealthiest countries in the world in the early 1900s. But they decided that they could do it all alone, tumbled from their perch, and have never recovered.
Takeaway: Without sustained industrial policy (think: training, tech investment, stable regulations), tariffs alone won’t bring a big wave of well-paying manufacturing jobs.
Q3: Has the administration revealed a scheme for resolving the reciprocal tariffs? How did they come up with these numbers? Does a trade deficit matter?
Well, the White House is using a method that basically divided the US trade deficit by total imports from each country. Then it halves that number, calling it the “reciprocal” tariff rate. Alphaville has a good explainer here. In simpler terms: the bigger the trade deficit the US has with a specific country, the higher that country’s tariff gets. But it’s a little confusing!
The calculation: So, as Bloomberg wrote, China “had a trade surplus of $295 billion with the US last year on total exports of $438 billion — a ratio of 68%” so divide that by 2 and you get a tariff rate of 34%.
US comparative advantage: Trump does seem to be quite obsessed with eliminating the trade deficit we have in goods, which would require the US to produce apparel and electronics and somehow grow all types of fruits and vegetables. However, we have a trade surplus in services, like high end manufacturing and finance, which is ideal for an advanced economy.
Trade deficits: These don’t automatically mean a country is “cheating.” A trade deficit means we import more from a country than we export to it. This can happen for benign reasons like strong consumer spending, the US dollar’s global strength, or the fact we don’t grow certain crops here. If we reduce imports from China via high tariffs, we might just buy from Vietnam or another country (likely Latin America based on the tariff rates). The overall deficit just shifts around because we simply cannot produce things like bananas or coffee here. Also, these are countries that send things to us, like Cambodia, so we have a giant trade deficit - but it isn’t because they are taking advantage of us, it’s because they simply can’t afford to buy our things. There is no way to ‘even out’ that deficit, and it really shouldn’t be a goal.
The world’s poorest countries are facing a double headwind of reduced aid and massive tariffs which could lead to geopolitical instability (and the continued rise of China).
Takeaway: A trade deficit isn’t automatically evidence of wrongdoing. Targeting it through broad tariffs can lead to supply-chain reshuffles rather than a genuine return of production to the US.
Q4: I really need help understanding how the dollar is impacted by all of this.
The US dollar tumbled after all of this was announced, which is confusing, because normally tariffs strengthen a currency. As Paul Krugman explained on Axios
Tariffs are supposed to reduce demand for imports. In the U.S. that would mean there's less need for businesses to exchange dollars for other currencies to buy foreign goods. That would translate into fewer dollars to trade on the currency market. Less supply means higher prices, but only if demand stays relatively constant
That’s normally what should happen. But the dollar went down because other countries don’t really like us right now. It’s a combination of lower net capital inflows (people choosing not to invest or buy in the US) and concerns about US growth prospects.
Takeaway: The dollar’s unexpected drop underlines global distrust in US policy. That distrust can feed into broader economic malaise, raising the cost of imports for Americans even further.
Q5: How are businesses reacting so far?
Atlas Shrugged captures it well (for however you feel about the novel):
Retailers: Companies like Amazon or big-box stores may pass on higher costs to consumers, or eat some of it in their profit margins. Target already said they would.
Manufacturers: American manufacturers rely on imported components (from semiconductors to raw metals) that are now pricier. Some might consider reshoring, but that’s a slow, expensive process, and labor might cost more here. From Joe Wiesenthal’s capture of the Institute for Supply Management survey -
Global Supply Chains: Firms that invested heavily in “China-plus-one” strategies (like Vietnam or Cambodia) are feeling whiplash. They moved out of China to avoid older tariffs - only to face new reciprocal tariffs in their new hubs.
Takeaway: Business responses vary, but none are painless. Many will pass costs on to consumers or hold off on expansion until the tariff landscape stabilizes.
Q6: Could this trigger a global trade war?
It’s a big risk. Tariffs often spark tit-for-tat retaliation. For instance, the EU (especially France and Germany) have signaled they’re looking at countermoves, like imposing their own tariffs on US goods or even taxing US tech and service companies. Historically, escalating protectionism (like the 1930s Smoot-Hawley tariffs) can really intensify global economic downturns. There’s also a possibility other nations will hold off and attempt to negotiate (like India). But the higher the U.S. tariffs go, the more likely it is that trading partners will feel forced to respond.
Takeaway: History is pretty clear: widespread tariffs can escalate quickly, harming global growth. We may see trade partners band together against the US or wait to see if our politics shift.
Q7: How will this impact China?
China will likely be a winner here. The tariffs could be quite bumpy for them in the short run, but in the long run, the new world order to coalesce around China in a way that completely shuts the US out of the picture. That’s the real short-term pain, long-term gain of this situation.
Other countries suffering are their gain: China will obviously be hit quite hard by a 54% tariff, but because the poorer countries around them are being hit hard too, so it could could provide a boost to China. As Bloomberg wrote, the tariff rates on countries like Vietnam (which, for example, produces half of Nike’s shoes due to the company trying to diversify away from China) “could potentially moderate the impact on China, as it may become more costly to substitute its products with imports from other countries.”
They have smart views on automation: China (and others) view robots as a complement to human labor, not a threat. They invest big in AI, robotics, and advanced manufacturing. That’s part of why they’ve become the world’s factory - it’s not just cheap labor; it’s also their scale, efficiency, and continuous improvement.
We are hurting ourselves: The tariffs really impact Americans the most. It's a good time to be a competitor. And other countries will decide to trade with one another - China, Japan, and South Korea held their first economic talks in 5 years(!) because this stuff is so messy.
Takeaway: Despite short-term pain, China could emerge stronger if it capitalizes on global frustration with US tariffs, invests in advanced tech (which they are on an absolutely unprecedented scale), and becomes the pivot point for trade alliances.
Q8: Didn’t Congress used to be in charge of tariffs? What are they even doing right now?
Under the Constitution, Congress does indeed control tariffs. However, a variety of laws allow the president to impose them for “national security” or under “emergency” authority (Trump did these tariffs under the guise of a trade emergency, and the Canada and Mexico tariffs under the guise of fentanyl and borders).
This is a workaround that oversteps constitutional bounds. Congress can pass measures to rein in these tariffs, but it’s politically tricky with a punisher President. Some GOP Senators are joining with the Democrats to challenge the Canada and Mexico tariffs, saying it amounts to a tax that only Congress can control, and hopefully they start doing their job more.
Takeaway: The executive branch’s growing tariff authority is contentious. Any check on this power hinges on Congress mustering the political will to intervene.
Q9: How does this all affect everyday people?
Well.
Higher prices: Many economists expect the tariffs to act like a tax on consumers. UBS projects a 10% universal tariff alone could lead to a 10% drop in the stock market, reflecting worries about corporate profits and rising consumer prices. The Tax Foundation estimates that the tariffs will result in an average tax increase of more than $2,100 per US household and the Budget Lab at Yale estimates it could cost as high as $3,800. TF estimates that tariffs will reduce US GDP by almost 1% and cut hours for over half a million full time jobs.
Stock market volatility: The stock market is already wobbling - especially retail, tech, manufacturing, and consumer goods stocks. A lot of people will say that the stock market isn’t the economy and therefore this shouldn’t matter - but the stock market is the economy in many ways, especially in terms of how businesses choose to spend and hire.3
Potential job uncertainty: Industries that rely heavily on trade (importers, exporters, and logistics). Some might cut costs (like Whirlpool and Stellantis) or trim payroll if profit margins get squeezed.
Bailouts: There are already talks of needing to bail out farmers. The US spent $32 billion bailing them out during the first round of tariffs, which has two implications - 1) any money that could have possibly been generated from tariffs will have to go to support instead of ‘paying down the debt’ and 2) that’s going to be a tremendous amount of bail out money, considering that the first round of tariffs were on $380 billion of goods - and these tariffs are on $2.5 trillion. Just with napkin math, that could be a $210 billion bailout package for farmers.
Bond market distress: High yield credit default swaps have risen on tariff concerns, which is concerning. The last thing we want is a bunch of defaults - that could very much complicate the macroeconomic picture. According to Deutsche Bank, “a drop in the dollar, a drop in US equities, and a rise in term premium in US Treasuries would be the strongest market signal that a process of US disinvestment is accelerating” Something to keep an eye on.
And it’s complicated - tariffs can turbocharge price increases, but they could lead to disinflation in the long run. The last time that we did them in 2018, prices went up and have stayed up. The way they could be deflationary is dependent on the Fed - so say, prices rise, costs are passed off to consumers, Fed tightens, and we get eventual disinflation, but that’s a long and arduous path.
As a result, many forecasters think inflation could spike, adding pressure on the Fed to juggle price stability with the risk of economic slowdown. Nick Timiraos highlights that the Fed is in a really tough spot - prices are high, hiring is down and rate cuts could boost rate-sensitive sectors like cars and housing, but those sectors are slammed by tariffs, so it’s almost a zeroing out of impact. Powell spoke on Friday, April 4th, and said:
Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem.
That means a lot of messaging. Get ready for some Fed speaker series.
Takeaway: Good personal finance habits (like saving diligently, diversifying investments, and monitoring inflation risk) help cushion volatility. We likely will see prices go up. Certain industries (farmers, exporters) might need massive bailouts, which ironically chews up any revenue tariffs generate.
Q10: He will just negotiate like he always does, right?
The administration says it’s open to revising rates “downward” if other countries reduce their barriers or cut bilateral trade deficits. If big deals get hammered out, tariffs could shrink. Trump said he was open to negotiations - he went back on what aides were saying he was going to do which was not negotiate, so, who knows.
Takeaway: Negotiations are on the table, but success depends on whether trade partners see a genuine path to compromise - or they decide to retaliate.
Q11: Is there a historical example of tariffs being used as a negotiation tool that worked out well?
Welp. The 1930 Smoot-Hawley Tariff is the classic cautionary tale. It aimed to protect US jobs during the Great Depression but led to retaliatory tariffs worldwide, shrinking international trade and worsening the global downturn. It’s not a perfect parallel, but it’s a reminder that broad, giant tariffs can create unintended economic damage - and can put us in the Kindleberger downward spiral. As Thomas Sowell said in a 2018 interview with Reason, “You do not make America great again by raising the price to Americans, which is what a tariff does.”
Takeaway: History shows that large-scale protectionism can backfire spectacularly. Any short-term gains often vanish in the face of retaliations and global slowdowns.
What’s Next?
Here is a probability tree from JP Morgan on what could happen to the economy over the next year. They see a 60% chance of a downturn on the horizon. I think that uncertainty is expensive, and the policies as a whole - the gutting of funding, the tariffs, the showmanship, the isolationism, the irrelevance (we’ve decided to become 17th century Spain in many ways) - create a painful economic environment for everyone. As Matt Klein said “the attacks on state capacity, on research, and on the rule of law, plus the general preference for policy arbitrariness vastly outweigh whatever incentives have been (temporarily) created.”
But there is always a chance that something works, right? Maybe this is all a strategy in convincing others you are crazy (which doesn’t work if players refuse to play, but still). And the question there, as Matthew Zeitlin said, is:
What indicators moving in what direction determine if the policies are working?
What state of the world over what time frame would be a sign that the policy isn't working or is net negative?
How long does it take to rebuild these supply chains, and is the public writ large willing to accept this period of transition/disruption?
While the administration believes they’ll revive American manufacturing, the short-term reality is potential higher prices, supply chain chaos, and a risk of global trade disputes. Watching how other countries respond - and whether Congress steps in - will be key to seeing if this policy remains or if it’s forced to soften.
Consumer staples, utilities, and cigarette companies are all trading well into the uncertainty. But Cullen Roche had some good advice: revisit your financial plan (or make one), try to think long term, and focus on things you can control. Only time will tell what the United States of America does next.
This was the first edition of my new “Actual Inbox” Q&A project. I hope this helps clarify some of the confusion around tariffs. If you have more questions about economics, markets, or just want to share your thoughts, feel free to write in. Thank you!
The Tax Foundation has a good tracker to use to keep up to date with what’s going on
Erica York at the Tax Foundation (who I have now interviewed three separate times over the past 7 months on tariffs) is really brilliant - she has a good breakdown of the White House claims on tariffs here
There’s also the wealth effect, people stop spending if they feel less rich, and it’s all tunnels and turmoil from there.
Love this new format, and thanks for the in-depth analysis as always
You know it’s bad when we have to quote Rand and Sowell. Great work, Kyla!