Free trade absolutists deride tariffs as exclusively inflationary, cost-inefficient, and disproportionately burdensome to the poor. And yet, the U.S. undeniably faces a persistent trade imbalance – one that leaves us bearing the short end of what should be otherwise prosperous global trade dynamics. But does that mean tariffs are the best way to solve them?
Some pundits have proposed the way to resolve this asymmetry is a weakening of the dollar. But this solution comes with no viable mechanism, other than a decoupling of the U.S. dollar’s role as the global reserve currency which is unlikely, and undesirable. There are good reasons why the dollar’s global dominance remains durable: an open economy without capital controls since 1974, deep and liquid markets, and a robust ecosystem for hedging and derivatives. The oft-cited Renminbi (CNY or CNH) is nowhere near capable of displacing the dollar – it lacks the market depth, rule of law, and convertibility that underpin USD hegemony. Make no mistake, China’s apparent goal is to entrench their competitive edge on a global scale and only THEN could they consider floating their currency, but that is a conversation for another time. Therefore, if we can continue to expect that countries will transact in U.S. currency, there simply isn’t a world in which other countries want to watch it unravel, if for nothing else than to protect themselves.
If we accept that even our trade counterparts don’t truly want the U.S. economy to falter (if only to protect their own interests) then the broader strategy behind Trump’s tariffs begins to come into view. Lopsided tariffs only work on the U.S. insofar as there is no equivalent response from the U.S. Trump seems keenly aware that if the U.S. falls into a recession, other countries will fall to a similar fate, or at the very least have serious problems of their own. This is part of what the Trump admin means when they say the U.S. “has the cards”, and why the success of tariffs is not necessarily best gauged by the stock market.
Perhaps a better measure of the effectiveness of tariff policy is to look at bond yields. This need not be speculative, as last month, Treasury Secretary Scott Bessent told reporters "The President wants lower interest rates and ... in my talks with him, he and I are focused on the 10-year Treasury". In other words, tariff threats act as a macroeconomic signal that slows the economy before any actual implementation, creating downward pressure on interest rates through risk aversion and capital reallocation into bonds. As the economy slows, money flows out from the stock market (uncertainty), and into bonds (certainty), driving down the 10yr with increased demand. What accompanies this real slowdown of economic activity is a cutting of the Federal Funds Rate by the Federal Reserve, leading to decreased short-term rates as well.
Interestingly enough, Bessent also makes the point when speaking of Trump that "He believes that if we ... deregulate the economy, if we get this tax bill done, if we get energy down, then rates will take care of themselves and the dollar will take care of itself". The 10yr and the price of USD are generally positively correlated, so Bessent here contends that tariffs are also key to a weaker dollar! In a way, there appear to be two distinct tariff philosophies within the Trump administration: Trump himself sees them as bargaining chips for broader concessions – whether trade-related or geopolitical – while advisors like Bessent view them as economic tools to suppress interest rates and weaken the dollar, benefiting financing conditions. To summarize, the goals of the Trump admin’s tariff fever could be seen as the following:
· Short-term and intermediate term costs (rates) of financing decrease.
· Decrease in the value of the dollar, resulting in easier export activity.
· Negotiated fairer trade terms that better reflect true comparative advantage.
A potential trifecta of macroeconomic gains: lower rates, more competitive exports, and fairer trade.
We’ve seen a version of this play out before as recently as Trump’s first term. In 2018, the U.S. imposed Section 301 tariffs on China. What accompanied it was not any sort of remarkable inflation shunted onto the consumer, but instead by Phase One of the U.S. China trade deal, a compromise that included pledges to increase Chinese imports of U.S. goods and improve IP enforcement. While imperfect, it showed that tariff pressure can yield concessions.
None of this is to suggest that Trump’s approach to tariffs is flawless. The execution has often been erratic; sometimes intentionally opaque, sometimes simply disorganized. And yes, critics are right to say that this strategy is walking a razor’s edge. Trump’s economic worldview has been compared to a form of American “Peronism”, emphasizing national economic independence, but often criticized for its resemblance to the policies that fueled Argentina’s long-term macroeconomic instability. And there's evidence that shows if the tariffs are truly enacted, and consumer behavior shifts back to U.S. goods, the dollar could actually end up strengthening, counter to productive trade abroad. Still, to dismiss it outright without engaging its underlying strategic logic is intellectually incurious. In fact, when you consider the sheer scale of China’s global trade dominance, bold and unconventional thinking begins to look less like recklessness and more like a genuine attempt to buck an unsustainable status quo:
Whether the gambit pays off or not remains to be seen. But at Castfirm, we continue to view the U.S. as the best place in the world to build and grow high-value businesses thanks to its favorable tax regime, entrepreneurial culture, and workforce flexibility. Whatever happens in the trade arena, we remain confident that America is not going anywhere.
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