Trump promised to impose tariffs and he's now delivering. These tariffs, effective on April 2, are significant, and target all countries indiscriminately. We are witnessing history in the making.

The reception has been mostly negative. Targeted countries have announced reciprocal tariffs or other punitive measures. Analysts and experts warned of the loss of trust of the US as a dependable trading partner. The stock market has been tanking. Overall, the general sentiment has been overwhelmingly negative.

I bring a more nuanced perspective. I don't agree with some of the common arguments brought up, and I plan to explain my thoughts here.

If there is one point that is the most misunderstood, it is the fear that these tariffs will cause the prices of imported goods to rise, causing huge inflation in a time when inflation is already a problem. It seems the prevailing understanding is that a 30% tariff will cause the price of imported goods to rise by 30%, and the added cost will ultimately be borne by the end consumer. This understanding most likely comes from a mental framework of trade and business transactions as follows: a manufacturer produces a product for $10 in a foreign country. The product is shipped into the US, where a $3 tariff is paid. Now, the consumer has to pay $13 whereas before the tariff, he would only have needed to pay $10. This is an oversimplification of reality, and unfortunately, the details contain factors that have the potential to greatly impact the overall outcome.

Let's start with some history. In the good old days, when things were made in the US, you did have the manufacturer make the product and sell them to consumers. With the industrial revolution and mass production, however, it wasn't just about creating the product and selling it to a consumer. A consumer may only need a single product, whereas a factory would be producing batches of hundreds or thousands of a product at a time. Introduce the middleman, the distributor. The distributor buys massive amounts from the manufacturer and sells them to the consumer in smaller quantities.

Now, there could be many parties involved in between the manufacturer and the consumer, with each party taking their cut of the profit. What I see, as a consumer, is that I'm not going to the manufacturer directly to buy the product. Often, I don't even know the manufacturer's name, and I wouldn't even know how to start looking. I'm going to the middleman, the store, to buy a product. The store then has their suppliers, who then buy from their suppliers and so on and so forth all the way back to the manufacturer.

What started happening in the 1980s seems to be that low cost imports started coming in. I don't think the problem was that consumers wouldn't pay the price of domestically made products if the price was just the cost of producing that product plus a modest profit for the manufacturer. It was much more complex. What happened was that the middlemen discovered they could buy imported products at a lower cost but still sell them at almost the same price, or with a slight discount, and pocket the additional profit. This widened their margins. Now, the question for them was, did it still make sense to sell domestically produced products with lower profit margins? What they would then do was to raise the price of domestically produced products in order to keep their profit margins the same as imported products. Now, consumers had to make a choice: they could either pay a lot more for domestically produced products, or pay a lot less for worse imported products. Many logically chose to save their money, especially if the imported product was good enough for what they needed.

As time went on, a few things happened. First, the share of imported products grew. Second, imported products got better, sometimes with the help of domestic manufacturers who chose to relocate or outsource. A side effect of the wider profit margins was that this allowed for more levels of middlemen to be able to slide themselves in. Some domestic manufacturers would shut down their domestic production, and instead buy white labeled imports, and become a middleman themselves. Finally, as domestic manufacturers lost market share, they lost scale, and with that, competitiveness.

Combined with ever rising labor union demands, foreign targeted attacks that obliterated certain industries that sourced the raw materials, leaving imports as the only option, and the domestic supply chain as a collective could not keep producing products at the same cost. Faced with this dilemma, domestic manufacturers with brand recognition fled into the premium market, while those without ceased to be. In the final stage, when domestic manufacturers could no longer command a higher price for better quality, they were replaced entirely by imports, so that they were no longer an option on store shelves available to the consumer.

In all of this, the middlemen would keep the additional profits if they could get away with it. The consumer, who was accustomed to paying a certain price, wouldn't be passed the savings.

This brings us to a crucial question: what determines the price of a product the consumer has to pay? The widely believed myth is that the price is the cost of producing the good plus the profit that makes producing the good worth the trouble. In truth, the price is much more commonly whatever the consumer is willing to pay. Sellers wouldn't voluntarily lower the price if they didn't have to. These profits then go to their shareholders, pumping up their stock price. This explains a paradox: despite domestic manufacturers going out of business, US companies are the most profitable and valuable companies in the world. This, in itself, causes another problem in the labor market: why work so hard to build things when you could be doing much better in a career of financial engineering.

For a while, consumers didn't care. Throughout the 1990s and 2000s, product prices were stable. In order to keep their profit margins, middlemen would find cheaper imports - first from Japan, then Taiwan and Korea, and finally China.

Then, the narrative changed. China managed to convince the world first to relocate their low value manufacturing to China due to the low cost of labor. Then, when labor costs rose, that they should stay because of a convenient supply chain. Finally, they also promoted the delusion that as China prospered, it would become the largest body of consumers for these products.

The reality was drastically different. Chinese companies, with help from the government, would systematically steal intellectual property from valuable companies, start their own companies, bully the original company out of China, and then go after them with cheaper clones around the world. After decades of this, we now have the current situation: the US where few things are made, importing everything abroad and being overly reliant on China for basic necessities.

This brings us to the tariffs and what I think their impact will be. Tariffs will not make a big difference in the prices that consumers see, as long as they are not willing to pay higher prices. I think that is the true motive for the current news cycle of proclaiming doom and gloom. They're painting a picture of scarcity in order to acclimate the consumer to the idea of paying higher prices. In reality, if the consumer does not tolerate higher prices, the middlemen will be the ones who will be squeezed. Some will sacrifice their profits, and others may be squeezed out. They may try to get their foreign suppliers to share in the pain. How that pans out is up in the air, but either way this wouldn't affect the consumer.

At the same time, tariffs will not immediately bring manufacturers back to the US. There is not a lack of money or capital, but governmental regulations and an unsuitable labor force are the major hindrances here. This is where the actions of Trump's administration is self-defeating. His inaugural speech was great. He talked about deporting illegal criminals. However, there are now reports of law-abiding, hardworking illegal immigrants that literally provide the labor in this country now being deported. This is going to set things back at a time when time is in short supply. But, I do hope momentum will gradually build up to get manufacturing back into the US, which I think is very possible, especially as a lot of advanced manufacturing is automated, so wages may not make domestically produced products uncompetitive with imports.

I understand that Trump's tariff was targeted not only at China, but more at the trend of friendshoring, or moving the supply chain to any other country than China and the US. In that light, these tariffs make sense. But, I think this does damage international relations with other countries. The US relies on its position of being the world's consumer, which is something that no other country can replace. However, while other countries may not have good options to retaliate at this point, a lack of goodwill may come back to bite the US later on down the road.

Ultimately, I agree with Trump's tariffs. The strength of a country lies in self-dependance and right now, the US is overly reliant on other countries, some of which have demonstrated the willingness to use that in disputes. For decades, the US has run a trade deficit and a federal budget deficit, which is a structurally unsustainable path. The US naturally has the capability to be self-sufficient, which is something few other countries can claim, so it's strange to me that it willingly put itself into a compromised position, depending on countries keen on upending the US as the world's superpower, and the desire to change this status quo is being met with fierce opposition.