Firm Policy or Negotiation?

There is no economist I respect as much as Thomas Sowell.

THE GOAT AND A NATIONAL TREASURE

In a rare occurrence, it appears I am on the other side of the fence with Thomas Sowell - but am I?

Dr. Sowell said this on Tuesday in an interview:

"It's painful to see what a ruinous decision from back in the 1920s being repeated. Now insofar as he's using these tariffs to get various strategic things settled and that he's satisfied with that but if you set off a worldwide trade war, that has a devastating history. Everybody loses, because everybody follows suit, and all that happens is you get a great reduction in international trade."

Of course, the media is focusing on the Smoot-Hawley angle and completely ignoring this part:

"Now insofar as he's using these tariffs to get various strategic things settled and that he's satisfied with that..."

Because I am in the camp of people who believe all this is about negotiation.

I'm also not hearing the argument from the other side as to why it is bad for the US to impose tariffs on foreign countries but not bad when countries impose them on us.

This is clearly a binary choice - tariffs are either always bad or they are not.

The fact is tariffs are not a panacea for countries imposing them because domestic prices of the goods “protected” by the tariffs can, and often do, rise and it is an established fact that tariffs are a cost that businesses must bear through increasing prices - just like corporate taxes.

Funny how Democrats understand that when it comes to tariffs but not domestic tax policy, isn’t it?

When a country imposes tariffs on imported goods to protect its domestic markets, the prices of locally produced goods can rise due to several interconnected factors. Tariffs make imported products more expensive, reducing the competitive pressure on domestic producers. Before the tariff, local companies often kept prices lower to compete with cheaper imports. But once imports become pricier, domestic producers can increase their prices without risking market share, as their goods remain cheaper than the tariffed alternatives.

This shift also sparks increased demand for domestically made products. As consumers and businesses turn away from costly imports, they may rely more heavily on local options. If domestic producers can’t quickly expand supply—whether due to capacity constraints, labor shortages, or higher production costs - this surge in demand can push prices upward. The effect intensifies if local firms face their own cost pressures, such as when they depend on imported raw materials or components affected by the tariffs. For example, a U.S. tariff on foreign steel could raise costs for American car manufacturers, prompting them to hike car prices to preserve profits.

In some cases, tariffs create a sheltered market that hands domestic firms greater pricing power. With fewer affordable imported alternatives, they might raise prices simply because they can, knowing consumers have limited choices. Together, these dynamics—reduced competition, heightened demand, cost pass-through, and increased market power—often lead to higher prices for domestic goods in the country imposing the tariffs, though the extent depends on the specific market conditions at play.

There are real world examples:

• Smoot-Hawley Tariff (1930): After the U.S. raised tariffs, prices of some domestic goods (e.g., agricultural products) rose as farmers faced less foreign competition, though the Great Depression’s deflationary pressures muddied the overall impact.

• U.S. Steel Tariffs (2002): When the Bush administration imposed tariffs on imported steel, U.S. steel prices rose, and some domestic steel-using industries (like auto manufacturing) passed those costs onto consumers, raising prices of American-made cars.

• Trump-Era Tariffs (2018–2019): Tariffs on Chinese goods led to higher prices for some U.S.-made products (e.g., appliances using tariffed components), though competition and strategic pricing limited the effect in other sectors.

The bottom line is that prices of domestically produced goods tend to rise when tariffs reduce import competition, especially if demand shifts heavily to local products or if domestic production costs increase.

I do believe President Trump’s team know this – especially if a lowly victim of the Mississippi public school and university system does. Trump’s business history is not that of an economist, rather one of a negotiator and deal maker. To make a deal with an opponent who already has an advantage, you must show a commitment to blow everything up and show them how much they have to lose – sort of how China saw Nixon (they thought he was nuts) or the USSR saw Reagan.

This is how I see it, and the wiggle room Dr. Sowell recognized.

I think Trump’s goal is to create the closest thing we have ever had to a truly free trade environment by forcing our largest trading partners to remove or severely reduce tariffs that would support the return of foundational industries to America.

Aside from solving significant national security issues, this is the only way we will ever grow our way out of the deep abyss of our national debt before we achieve the state of “sinning and suffering” predicted by Thomas Jefferson.