Hopefully this will make sense - let me know if not
Two of the major ways you can suppress demand:
1. You suppress wages which means the labour input (i.e. wage bill) for products is lower - this is basically what Germany did post 2003 and the Hartz reforms - the unions agreed to restrict pay demands at effectively below inflation - German workers got poorer but exports got more competitive
2. You suppress the value of your currency which means people can buy more stuff from you cheaply but it means imports and foreign holidays are more expensive - China currently does this by pegging the Yuan (their currency) to the dollar i.e. they force it to stay at set value versus the dollar unless they want to move it
In both cases it means the population can less afford to consume and this compresses domestic consumption whilst in both cases increasing the profitability of your exporters
Worth noting that Germany and China actually use both models as do plenty of other countries to varying degrees
The end result is a big trade imbalance will build up with you exporting more than you import
This has knock on impacts including:
1. This suppresses over all global demand as you are artificially compressing your own and thus stealing other countries demand - imagine how much better the world economy would be if places like Germany and China consumed at the same level as the rest
2. You will build up increasing amounts of assets from the profit from the trade imbalance which has to go somewhere and this traditionally has flowed into the Anglophone countries but especially US financial assets i.e. the stock market but also the bond market - this causes stocks to go up but bond yields to fall which can helps to generate an even bigger debt bubble
Hi Dan, I've been a huge fan of your writing for some time now (years). In this piece there is a sentence I don't understand: "They have for years used policy and currency manipulation to suppress domestic demand in order to promote exports". To understand better, what would be the advantage of supressing domestic demand to promote exports? I mean why would anyone do that? Can you give me an example? The rest of the article is so powerful; we hear nothing now of the Northern Powerhouse. We don't have any capacity for manufacturing steel we may need to make weapons for this phoney war Starmer is edging towards. Please keep up the good work.
"Mercantilist states whining on about the US imposing tariffs only have themselves to blame. They have for years used policy and currency manipulation to suppress domestic demand in order to promote exports. "
If Trump were only targeting these states with the tariffs, I would largely agree with you on this. Unfortunately that isn't what he's actually done - rather than impose 'reciprocal' tariffs as he claims, he's confused 'trade deficit' with 'tariffs', and calculated tariff rates based on each country's deficit as a percentage of its exports to the US. So for instance Israel, which just removed ALL its tariffs on the US, gets slapped with a 17% tariff rate because the US trade-deficit-to-exports ratio with Israel is roughly 33%. And where the US has a trade SURPLUS with a nation (like the UK), they've simply slapped on a 10% tariff anyway, just because.
The problem is that tariffs and trade deficits are only very vaguely related (if at all) for the vast majority of countries. If one country has 2 million people compared to the US's 350m, obviously they're not going to be able to buy as much from the US as the US does from them, even if there are no trade barriers and prices are exactly the same. I like a lot of what Trump is doing but this particular thing isn't some brilliant plan; he just doesn't understand how trade works.
There's no easy way to fix the trade deficit issue, so if the tariffs stay in place, it's just going to massively raise prices for Americans to no purpose. Some reshoring will probably happen but it certainly can't be done overnight, and in the meantime a lot of countries will impose retaliatory tariffs which will harm American manufacturing. It's also going to do huge harm to a lot of Asian countries which would otherwise be allies against the real bad actors like China. I hope they manage to come to some sort of agreement, but in the meantime I guess the US is just going to have to learn the hard way.
I agree with your analysis. I also disagree with the comment about reciprocal tariffs. That is the actual genius of Trump's approach, not the error.
It accounts for not just monetary tariffs but puts a price on other barriers to entry for US corporations to a market and penalises that behaviour.
Re the UK Northern Powerhouse, that won't happen until they exploit the masses of shale gas right underneath their feet. Until that nettle is grasped the decay will continue and accelerate.
So what exactly are the other barriers to entry and how are other countries supposed to remove them? Imagine you're a country who's willing to cooperate with the US on tariff reduction, and you've already set all your import tariffs to zero. You don't have any currency controls, subsidies for domestic industry, or other protectionist policies. Now you get slapped with an export tariff purely because you export more to the US than you import from them. What are you supposed to do to get the tariff removed?
Used by Chinese corporations to avoid US tariffs, in the main.
A political decision by the Vietnamese government, which now has consequences.
Ireland is another. Using Ireland's corporation tax rules to minimise US tax liabilities for the likes of Apple, Meta, Google etc. Thus Ireland has a massive “trade” surplus with the US. Ireland is fortunate to be in the EU and the surplus is thus diluted, otherwise it would be facing Vietnamese level tariffs itself.
Again, a political policy decision which the US believes to be unfair.
It's reasonable to ask whether those countries' economic policies are fair or a good idea, but the things you mentioned are not 'barriers to entry' as such. There's nothing stopping the US from lowering its corporation tax rate if it wants to, and they themselves previously encouraged companies to shift manufacturing to countries like Vietnam in order to reduce reliance on China. As for the EU, it certainly has some protectionist policies which affect trade with the US, but your comment about Ireland vs. EU tariffs kind of proves my point: there's very little any individual country can do to get the tariffs removed. That's because they're not based on specific, quantifiable barriers to free trade, but on Trump's vague idea that buying stuff from other countries is 'bad' whereas selling to them is 'good'. But that's not how trade is supposed to work: the whole point is that both sides benefit by getting something they want (either goods or money, respectively). Should we go back to some kind of barter system where you can only swap goods for other goods of roughly equal value?
I can certainly see a case for partial reshoring of some industries, particularly strategic ones like steel and electronics. I think the West in general has become far too reliant on unfriendly countries (China, Russia) for basic necessities. I just don't think slapping random tariffs on friend and foe alike, based purely on trade imbalances, is the right way to go about it. If anything it might even benefit China to some extent, as other countries will start looking for alternative markets for their own goods, so will be more willing to trade with them.
If the tariffs are really a pretext for negotiations which will reduce trade barriers overall, fair enough. If not... as someone who likes the US and wants it to succeed (I wish I could move there myself honestly), I'm concerned about the future.
Hi Chris
Hopefully this will make sense - let me know if not
Two of the major ways you can suppress demand:
1. You suppress wages which means the labour input (i.e. wage bill) for products is lower - this is basically what Germany did post 2003 and the Hartz reforms - the unions agreed to restrict pay demands at effectively below inflation - German workers got poorer but exports got more competitive
2. You suppress the value of your currency which means people can buy more stuff from you cheaply but it means imports and foreign holidays are more expensive - China currently does this by pegging the Yuan (their currency) to the dollar i.e. they force it to stay at set value versus the dollar unless they want to move it
In both cases it means the population can less afford to consume and this compresses domestic consumption whilst in both cases increasing the profitability of your exporters
Worth noting that Germany and China actually use both models as do plenty of other countries to varying degrees
The end result is a big trade imbalance will build up with you exporting more than you import
This has knock on impacts including:
1. This suppresses over all global demand as you are artificially compressing your own and thus stealing other countries demand - imagine how much better the world economy would be if places like Germany and China consumed at the same level as the rest
2. You will build up increasing amounts of assets from the profit from the trade imbalance which has to go somewhere and this traditionally has flowed into the Anglophone countries but especially US financial assets i.e. the stock market but also the bond market - this causes stocks to go up but bond yields to fall which can helps to generate an even bigger debt bubble
There are also a myriad of other methods used
Just a rough idea though for you
Hi Dan, I've been a huge fan of your writing for some time now (years). In this piece there is a sentence I don't understand: "They have for years used policy and currency manipulation to suppress domestic demand in order to promote exports". To understand better, what would be the advantage of supressing domestic demand to promote exports? I mean why would anyone do that? Can you give me an example? The rest of the article is so powerful; we hear nothing now of the Northern Powerhouse. We don't have any capacity for manufacturing steel we may need to make weapons for this phoney war Starmer is edging towards. Please keep up the good work.
"Mercantilist states whining on about the US imposing tariffs only have themselves to blame. They have for years used policy and currency manipulation to suppress domestic demand in order to promote exports. "
If Trump were only targeting these states with the tariffs, I would largely agree with you on this. Unfortunately that isn't what he's actually done - rather than impose 'reciprocal' tariffs as he claims, he's confused 'trade deficit' with 'tariffs', and calculated tariff rates based on each country's deficit as a percentage of its exports to the US. So for instance Israel, which just removed ALL its tariffs on the US, gets slapped with a 17% tariff rate because the US trade-deficit-to-exports ratio with Israel is roughly 33%. And where the US has a trade SURPLUS with a nation (like the UK), they've simply slapped on a 10% tariff anyway, just because.
The problem is that tariffs and trade deficits are only very vaguely related (if at all) for the vast majority of countries. If one country has 2 million people compared to the US's 350m, obviously they're not going to be able to buy as much from the US as the US does from them, even if there are no trade barriers and prices are exactly the same. I like a lot of what Trump is doing but this particular thing isn't some brilliant plan; he just doesn't understand how trade works.
There's no easy way to fix the trade deficit issue, so if the tariffs stay in place, it's just going to massively raise prices for Americans to no purpose. Some reshoring will probably happen but it certainly can't be done overnight, and in the meantime a lot of countries will impose retaliatory tariffs which will harm American manufacturing. It's also going to do huge harm to a lot of Asian countries which would otherwise be allies against the real bad actors like China. I hope they manage to come to some sort of agreement, but in the meantime I guess the US is just going to have to learn the hard way.
I agree with your analysis. I also disagree with the comment about reciprocal tariffs. That is the actual genius of Trump's approach, not the error.
It accounts for not just monetary tariffs but puts a price on other barriers to entry for US corporations to a market and penalises that behaviour.
Re the UK Northern Powerhouse, that won't happen until they exploit the masses of shale gas right underneath their feet. Until that nettle is grasped the decay will continue and accelerate.
So what exactly are the other barriers to entry and how are other countries supposed to remove them? Imagine you're a country who's willing to cooperate with the US on tariff reduction, and you've already set all your import tariffs to zero. You don't have any currency controls, subsidies for domestic industry, or other protectionist policies. Now you get slapped with an export tariff purely because you export more to the US than you import from them. What are you supposed to do to get the tariff removed?
Vietnam is a good example.
Used by Chinese corporations to avoid US tariffs, in the main.
A political decision by the Vietnamese government, which now has consequences.
Ireland is another. Using Ireland's corporation tax rules to minimise US tax liabilities for the likes of Apple, Meta, Google etc. Thus Ireland has a massive “trade” surplus with the US. Ireland is fortunate to be in the EU and the surplus is thus diluted, otherwise it would be facing Vietnamese level tariffs itself.
Again, a political policy decision which the US believes to be unfair.
It's reasonable to ask whether those countries' economic policies are fair or a good idea, but the things you mentioned are not 'barriers to entry' as such. There's nothing stopping the US from lowering its corporation tax rate if it wants to, and they themselves previously encouraged companies to shift manufacturing to countries like Vietnam in order to reduce reliance on China. As for the EU, it certainly has some protectionist policies which affect trade with the US, but your comment about Ireland vs. EU tariffs kind of proves my point: there's very little any individual country can do to get the tariffs removed. That's because they're not based on specific, quantifiable barriers to free trade, but on Trump's vague idea that buying stuff from other countries is 'bad' whereas selling to them is 'good'. But that's not how trade is supposed to work: the whole point is that both sides benefit by getting something they want (either goods or money, respectively). Should we go back to some kind of barter system where you can only swap goods for other goods of roughly equal value?
I can certainly see a case for partial reshoring of some industries, particularly strategic ones like steel and electronics. I think the West in general has become far too reliant on unfriendly countries (China, Russia) for basic necessities. I just don't think slapping random tariffs on friend and foe alike, based purely on trade imbalances, is the right way to go about it. If anything it might even benefit China to some extent, as other countries will start looking for alternative markets for their own goods, so will be more willing to trade with them.
If the tariffs are really a pretext for negotiations which will reduce trade barriers overall, fair enough. If not... as someone who likes the US and wants it to succeed (I wish I could move there myself honestly), I'm concerned about the future.