The concept of a tariff isn’t always bad. Some countries have used them to great success for focused purposes. @planetmoney just had a great episode highlighting how South Korea used to have no auto industry, but helped encourage Hyundai to move into the auto business with focused tariffs to provide cover to the young business while it became established. The auto tariff incentivized South Koreans to buy Hyundais rather than imports. But once Hyundai was established, the removed the tariffs so Hyundai could grow and compete globally rather than be reliant on the cover of the large import tax on their citizens.

What’s happening now doesn’t seem to have the same focus or obvious purpose. For example, the new tariffs tax EVERYTHING, even things we can’t produce in the US like bananas or coffee. (Hawaii does produce about 0.2% of the US coffee consumption, but ask your nearest coffee lover if they feel like cutting back by 99.8%) The proposed tariffs are also weighted to correct each bi-lateral imbalance. In other words, it seems the goal is to make sure we’re importing and exporting an equal amount with EACH individual country. But that doesn’t make sense and here’s why:

Consider this fictitious three country world with: USA, Bananastan, and Factoryville. Imagine the USA strictly imports bananas from Bananastan and exports nothing. Quite the imbalance. Bananastan imports farm equipment from Factoryville and exports nothing. Factoryville spends all that money on US banking and tech services, but exports nothing. All three countries have extreme trade imbalances with each other. Yet the free trade benefits everyone. The USA penalizing Bananastan for not buying enough US goods only serves to disrupt the cycle of trade, hurting everyone. It’s cutting off your nose to spite your face.

I don’t know what’s going to happen here. I’m not sure anyone does. I’m still buying and holding of course. But let’s hope it’s straightened out before too much more damage is done to the economy!

As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.

-Jeremy