Happy Liberation Day to Those Who Celebrate

And more from this week...

Well, that was a week. A hearty welcome to all the new Understanding America subscribers! Learn your way around by reading my introductory post and more about me. You’ll be getting a new essay each Monday and a roundup each Friday.

I know it’s been a bit tariff-heavy here lately, but that’s what it seems like folks are having the most trouble Understanding right now. In America. So your one thing to read is actually from the archives: an essay in National Review written by my colleagues at the time, Wells King and Dan Vaughn Jr., on The American Camry.

(If you are blocked by the paywall, you can also read the case-study version we published at American Compass.)

The essay tells the story of a newly inaugurated Republican president concerned that imports flooding into the United States from an export-oriented economy were threatening American industry:

While some in his cabinet advised doing nothing, Reagan negotiated an import quota with Japan, sharply constricting the flow of vehicles into the United States. This was not a subtle or fine-tuned policy; it simply prohibited imports from rising above the 1979 level.

Notably, the quota was not imposed by the United States. It was a “voluntary export restraint” (VER), self-imposed by the Japanese, under threat of more aggressive U.S. action including tariffs. The result:

It worked. Detroit turned around, and the Japanese firms invested tens of billions of dollars in a massive new manufacturing base in the South that created hundreds of thousands of American jobs — the single, exceptional example of significant foreign manufacturing capacity relocating to America instead of the other way around. Anyone hoping for more of the same today should take note.

Japan-based firms continued to take market share from U.S.-based firms, but the vehicles were American made, with increasingly American supply chains. For years, the Toyota Camry had more American-made content than any other vehicle on U.S. roads. Today, not only the Camry, but also three Hondas and a Volkswagen are more American-made than the most American car from any of Detroit’s “Big Three.”

It's a fascinating story, worth reading in full to begin making sense of the tariff regime announced by President Trump on Wednesday. Plenty of confusion surrounds both the rationales for and the methodological details of the action, and some of that is the Trump administration’s own fault for failing to communicate clearly what they are doing. But if one wants to understand what’s going on, I think the structure of the final plan and comments from various administration officials allow for some fairly strong inferences, and the story of Reagan and the VER gives the best illustration of where we’re likely headed next.

1. The Global Tariff. By all accounts, the global 10% tariff on nearly all imports seems intended to be permanent. For one thing, it offers a stable and substantial source of revenue. For another, it’s not clear the route by which it might be removed. Country-specific tariffs, which we’ll get to, can be negotiated on a country-by-country basis. But a global tariff, by definition, implies the same rate should be imposed regardless of another country’s policies or economic features. So no particular set of actions or changes by another country would seem a plausible basis for changing it.

A final indication that Trump does not plan to modify the 10% tariff any time soon is his decision to exempt Mexico and Canada. Those countries both face other, specific tariffs that he had already imposed, but the administration seems to be envisioning a renegotiation of USMCA that would address U.S. priorities and result in those other tariffs being dropped, at which point “North America can serve as the core of a U.S.-led trading bloc.”

American Compass has long advocated for a global 10% tariff, and you can read more about how it works and what problem it intends to solve in our policy brief from 2022. One difference in that proposal is an adjustment mechanism, with the global rate rising or falling based on the overall U.S. trade deficit. But Trump appears to have a different method in mind for closing the deficit…

2. Reciprocal Tariffs. Reports in the days prior to Liberation Day indicated that the administration was debating between a global tariff and reciprocal tariffs. The decision to do both suggests that they have different purposes, and that while the global tariff works best as a permanent baseline preferencing domestic production and raising revenue, the reciprocal tariffs are intended as negotiating leverage.

As I predicted in February, Trump’s focus on trade deficits and the need for balanced trade indicate a focus on proportionality rather than outright reciprocity. Reciprocal tariffs designed simply to mirror foreign tariff rates would have had little relationship to the problem he was targeting, and countries could have evaded them simply by dropping their own formal tariffs to zero and relying on other forms of trade distortion. In theory, one could try to create a calculation that accounts for all non-tariff trade barriers and distortions and spits out a comparable tariff. In practice, good luck. If what Trump cares about is trade imbalances, and he wants to use tariffs to force other countries to reduce those imbalances, what makes sense is to scale the tariff to the size of the imbalance. This is what he did.

The implication: You want a lower tariff? Work on your imbalance.

This is where the VER example applies. Do countries really control their trade imbalances? Not entirely, no. But to a large extent yes. Not by coincidence do all those countries pursuing export-led growth in fact achieve large trade surpluses. They make policy choices—on subsidies, on currency, on procurement, on regulations, and so on. What Reagan showed in 1981 is that if you can change another country’s calculus, so that its interest is to fix the imbalance rather than foster it, the policymakers have all sorts of tools at their disposal to achieve the new goal. At the extreme, a country can and indeed will literally block the imports of its own producers and tell them to build production capacity in the United States.

The reciprocal tariffs are, by definition, temporary. If deficits come down, the rates would presumably come down too. But Trump has not made clear what exactly he’s looking for, or how any of this is supposed to work. For now he seems content, at least publicly, to sit back and wait for countries to come to him. Perhaps that is the best negotiating strategy. But as a political matter, it has left the public, the markets, and other countries confused about what is going to happen and how. When you hear “reciprocal tariffs,” my best advice is, think VER.

3. China. The Trump administration has already hit China with 20% in targeted tariffs, on top of which it has now layered a 34% reciprocal tariff. The 54% total is higher than for any other country. Note also how this differs from Canada and Mexico, which also face targeted tariffs but got neither the global tariff nor a reciprocal tariff on top. With Canada and Mexico, the goal seems to be a quick negotiation and a return to free trade. With China, by contrast, I think these enormous tariffs are here to stay.

One reason for this assumption is that the total value is now approaching the 60% China tariff, alongside a 10% global tariff, on which Trump campaigned. Whereas he sought a deal with China in his first term, now the dealmaking seems focused elsewhere, with China on the permanent naughty list. Trump’s support for revoking China’s Permanent Normal Trade Relations offers further evidence in support of the China-Out theory. So too, Treasury Secretary Scott Bessent’s indication that the U.S. is pushing Mexico and Canada to harmonize their tariffs toward China with the U.S. policy.

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That’s how I interpret the plan: permanent global tariff to give preference to domestic manufacturing, permanent China tariff to decouple our economies, reciprocal tariffs as stick to drive deficit-reducing policy choices by other trading partners. The end result, as I wrote about at the beginning of the week, would be an economic and security alliance that fosters free trade among countries that can agree to balanced trade, burden owning, and China out.

If this is correct, the Trump administration needs to do a few things:

1. Communicate the goals and rationales much more clearly. The American people, markets, and allies all need to understand what is happening and why if they are to support or at least accept the administration’s plan.

2. Legislate the permanent elements. The credibility, stability, and legality of the permanent tariffs would all be greatly improved if Congress codified them. A bipartisan bill already exists for revoking China’s PNTR status, and it was co-sponsored by Secretary of State Marco Rubio when he was still in the Senate. A bill for a 10% global tariff has already been introduced in the House, by a conservative Democrat. Investors will only redeploy trillions of dollars in response to new rules if they believe those rules are going to stick.

3. Revisit sequencing. I continue to believe that a predictable and credible phase-in for tariffs can achieve nearly the same positive effects of an immediate imposition, while greatly reducing the costs. The 10% global tariff is already a gradual enough step. But going literally “0 to 60” with a country like China imposes large costs on American firms and consumers much more quickly than they can plausibly take the constructive actions we might want. That serves no one. Likewise, if we expect producers to lose access to foreign markets—especially China’s—it’s important for that not to happen faster than the removal of Chinese firms from the U.S. and allied markets is creating new opportunities for sales.

4. Provide support. Finally, Liberation Day needs to be the start of a much larger program of reindustrialization, not a one-and-done action that effectively leaves the troops stranded on a narrow beachhead. Especially seeing as the administration has chosen to exempt semiconductors from the tariffs, successful implementation of the CHIPS Act is vital. Other industries where accelerated investment is especially needed should receive support from industrial policy too. Bringing more energy online, cutting red tape, and building infrastructure are vital. And most importantly, according to both the American people and American businesses, workforce training needs a major boost.

There’s no reason the United States cannot achieve a policy success like the Japan VER ten times over, and then achieve another ten comparable successes that increase foreign purchases from American producers. But announcing the tariffs is only the first step. If this is where we stop, we will not get where we need to go.

WHAT ELSE SHOULD YOU BE READING?

When the GOP Supply-Siders Hated Tariffs and Trusted the Stock Market | Jim Pethokoukis, AEIdeas

A fascinating overview of the 1970s “supply-side” ideology that led conservatives to conclude that the stock market’s performance was “the most efficient and accurate gauge of future economic activity.” What’s funny about this account is that the only alternatives to this view considered are “that markets can be fundamentally mispriced or driven primarily by irrational speculation.” Is it possible that the corporate profits valued by equity holders just aren’t a very good proxy for overall prosperity? Could Adam Smith have been right to warn that the rate of profit is “always highest in those countries which are going fastest to ruin”? I guess not.

What’s even funnier is that, as Trump officials have taken the vital step of recognizing and saying out loud that the stock market is not necessarily an effective measure of good policy or national potential, the Democrats who used to decry the supply-side obsession with the Dow are running to embrace it. Former Treasury Secretary Larry Summers went so far as to suggest that he could simply take stock market losses, scale them up based on corporate profits as a share of GDP, and he would have the society-wide losses.

China’s Tariff-Dodging Move to Mexico Looks Doomed | Rebecca Feng and Santiago Perez, Wall Street Journal

This is a great summary of how badly the U.S.-Mexico trading relationship was broken and how rapidly the U.S. deficit with Mexico was rising, driven by enormous Chinese investment. It is also a great summary of how quickly the Trump actions are changing the calculus.

Passing the Point of Resistance | Clare Morell, Commonplace

Terrific feature on the political dynamics of cell phone bans in schools. I’m always surprised by how little initial support there is for such bans, not only among students, but also among parents, given the overwhelming evidence of success when implemented. Morell explains the hurdles that must be overcome, and the breakthrough that occurs when people see the results.

The End of College | Ian Bogost, The Atlantic

This was something. First, the idea that universities finally emerging from the DEI crusades, Covid lunacy, and antisemitic activism of the past five years are now “in chaos,” experiencing “particular distress,” and facing “the greatest threat to American universities since the Red Scare…” Save it.

But more striking is the way the author rhapsodizes about the “brochure-ready college life” now at risk if federal subsidies dry up. The idea that we should really be worried about federal research funding cuts because actually that funding helps pay for the shiny new student center is not quite the argument the author thinks it is. In fact, the amusement park entitlement that higher education has become is one of our nation’s most toxic social distortions. Turning off the money spigot is a vital reform. If universities are concerned about losses in research funding, they have no shortage of other spending to cut first.

AT COMMONPLACE

If you want even more on tariffs, we’ve got it:

How to Think About Liberation Day | Nicholas Phillips

The strategic logic behind America’s tariff revolution, and what success will require.

Liberation Day Puts Main Street Ahead of Wall Street | Batya Ungar-Sargon

Trump’s tariffs make his commitment to America’s forgotten men and women clear.

And after we published her fantastic reported feature last week, Amber Lapp, research fellow at the Institute for Family Studies, joined me on the American Compass Podcast to continue discussing how the stories from one street in one small town in Ohio illuminate the statistical picture of America’s missing men.

As always, check out commonplace.org, follow us on X @commonplc, and subscribe for regular articles directly in your inbox.

Enjoy the weekend!