The thinking behind Trump’s tariffs
Trump has been starting his presidency in full force, creating much global friction, as it relates to Ukraine, the Middle East and with tariffs. In his first term as president, Trump was predominately focused on China, but this term he is also turning his head across the Atlantic, to deal with Europe and what he calls unfair trade.
Free traders love to call tariffs a tax on consumers and argue that tariffs distort the market and make us all poorer.
All of this would be very persuasive if we lived in the world of Econ 101, where trade is always voluntary, markets adjust perfectly, and governments do not cheat. But in the real world, global trade imbalances are not the result of free trade and free exchange, they are the result of an unsustainable rigged system created by state intervention. Now we are talking China and Europe. And tariffs are not a distortion, they are a correction, a necessary counterweight to the economic distortions China and other mercantilist nations have already imposed on the system.
Why has the U.S. run massive trade deficits for decades, while China has posted massive trade surpluses? China’s trade surplus is not a natural market outcome, it is a function of state policy. China’s economic policies suppress domestic consumption in favor of manufacturing and exports, and the cost of this distortion gets exported to the U.S. and other trade partners.
Beijing’s policies systematically redirect income away from households and toward producers by suppressing wages, limiting capital outflows, and manipulating interest rates. Wages remain artificially low, ensuring that labor does not get its fair share of economic output. Interest rates are kept below market levels, reducing household savings returns while making capital cheaper for industrial expansion. Capital controls prevent Chinese investors from seeking better returns abroad, meaning domestic savings get funneled into the state-directed financial system, fueling industrial overcapacity rather than consumption. And to ensure that China’s exports remain competitive, the government has long intervened in currency markets to keep the yuan undervalued.
The result is an economy that produces far more than it consumes. Rather than allowing wages and domestic demand to rise naturally, China exports its economic distortions, flooding global markets with artificially cheap goods while accumulating massive trade surpluses. Someone has to absorb that excess production, and for decades, that role has fallen to the United States.
American industries are undercut, manufacturing jobs disappear, and U.S. consumers, while enjoying cheap goods, end up financing the entire system through chronic trade deficits. China’s trade surpluses also generate massive capital inflows into U.S. financial markets, driving down interest rates and fueling asset bubbles in stocks, bonds, and real estate.
Free-market economists argue that trade imbalances should resolve themselves naturally. If China is running a surplus and the U.S. a deficit, currency exchange rates should adjust, wages should rise in China, and capital should flow to equalize global production and consumption. This assumes that transaction costs and market frictions are minimal. When barriers, restrictions, or manipulations interfere with free exchange, bargaining no longer produces optimal outcomes. And that is precisely what we see in global trade. In an ideal world, Chinese workers would demand higher wages, the yuan would appreciate, and capital would flow freely to correct these imbalances. But China’s government has deliberately constructed an oppressive economic and political system that prevents this from happening. The same is the case in Europe and it drives Trump to focus on tariffs.
If China suppresses wages, restricts capital flows, and manipulates its currency, then voluntary market mechanisms cannot restore balance. If market distortions cannot be negotiated away, policy intervention is required.
In global trade, Europe’s and China’s interventionist policies are introducing artificial constraints, suppressed wages, restricted capital flows, and state-managed currency valuation, that distort the natural balance of production and consumption. From Trump’s perspective, tariffs function as the necessary counteracting force to restore balance. Trade imbalances are not temporary deviations from balance, they are the product of deep, structural asymmetries that require active correction.
A tariff is not merely a tax. It is a compensatory field that corrects the economic distortion caused by Europe’s and China’s industrial policy. If they China suppresses wages and floods the U.S. with cheap goods, tariffs adjust prices back to where they should be in a market that is not rigged. The purpose of tariffs is not to pick winners and losers, but to neutralize external distortions. Trump is proposing a policy of trade symmetry: if a country imposes tariffs, subsidies, or trade restrictions on U.S. goods, America will respond with an equal and opposite measure.
According to the Trump administration, the true distortion is not the tariff, it is the rigged global trade system that made tariffs necessary. If free trade existed in its idealized form, Trump’s tariffs would not be needed. But because Europe and China have spent decades warping the system, tariffs are the only tool available to restore equilibrium.