Tax Cuts for Billionaires, Millions Losing Their Health Care, and Other Fairy Tales

No, billionaires aren't getting a tax cut.

Hardly anybody is, actually.

The proposed bill, which has yet to pass the full House and Senate, does include the proposed elimination of taxes on tip income and overtime pay. (Both of those provisions would sunset at the end of 2028 unless extended.)

How many billionaires do you know who make their living on tips or hourly wages?

Nobody who currently has income subject a tax bracket, including the billionaires who occupy the top tax bracket (along with anybody else who makes more than about $609,000 a year (single) or $731,000 a year (married filing jointly), is getting a tax cut.

Say what?

That's right - nobody is getting a tax cut. The tax cuts went into effect in 2017 with the passage of the Tax Cut and Jobs Act (TCJA). That legislation provided that the cuts would sunset at the end of this year if not extended. The proposed bill (I won't say the name of it because it's a stupid name) merely extends those rates. It doesn't cut taxes for anyone (except tip and overtime earners).

Therefore, when the Democrats in Congress say that billionaires are getting a tax cut, they're essentially lying. And if they vote against the bill, they're voting to let the current tax rates sunset at the end of this year, meaning that they're voting for tax rates to go up next year - on billionaires, millionaires, you, me, and single filers making as little as $13,000 a year, married joint filers making as little as $25,000 a year.

In other words, they'll be voting to raise taxes on the rich, the middle class, and the poor.

What other tax provisions are in the proposed bill? The Child Tax Credit would increase by a whopping $100, but that phases out with income, so billionaires don't qualify.

There's a proposal to allow the deductibility of interest on car loans for cars made in the U.S. Billionaires pay cash for cars, so that doesn't benefit them either - that would be a low- to middle-class benefit.

The estate tax exemption would double, from $15 million to $30 million, vs. letting it drop to $7 million if the TCJA were allowed to expire. So yes, that tends to benefit wealthier Americans, since they can leave a larger amount to their heirs without incurring estate taxes. And most of us don't have an estate larger than $15 million. But it would also benefit farmers who aren't that wealthy in terms of income, but have a lot of land, and want to keep the family farm in the family. It's not like those farmers are "rich" in the sense that the entitled class can "soak" them; they'd have to sell the farm to redistribute their wealth to pay off your kids' student loans.

And there are business tax provisions that would benefit businesses, including small businesses that are owned by wealthy individuals, as well as large corporations that are owned by stockholders. Let's examine that.

Those small businesses hire the wage earners that are going to get their taxes eliminated on their overtime pay. So the workers benefit if those businesses are able to hire more workers and/or pay more overtime. And they hire the people who work for tips, who also benefit.

As for stockholders, I heard one liberal talking head (who should know better, he used to work on Wall Street) say that anything that benefits the stock market only benefits the rich.

Really? I started investing in stock mutual funds (which own individual stocks, in case you haven't figure that out yet) when I was in my twenties, in a 401(k). I sure wasn't rich back then. Teachers and nurses have pension funds that are invested in the stock market, and most of them aren't rich either. In fact, the largest stockholders in the country are institutions that manage retirement funds. If you have a 529 plan for your kids or grandkids, it's probably at least partially invested in the stock market, and the kiddos don't even have an income yet.

The standard deduction would increase by a couple thousand, which pretty much benefits everybody who doesn't itemize. There's a boost to the standard deduction for seniors. There's a low-income housing tax credit - that certainly doesn't help billionaires.

The most egregious of the tax provisions, in my view, is the proposal to lift the state and local tax (SALT) exemption from $10,000 to $30,000. That would also be phased out at higher income levels. Why do I find it egregious? Because it only benefits those who live in places that have extraordinarily high state and local taxes. So legislators in places like New York, Connecticut, California, and Hawaii are clamoring for it - they hated the $10,000 limit imposed in the TCJA.

But why should taxpayers in the rest of the country effectively subsidize the states where ridiculous over-regulation and entitlement programs like sanctuary policies have resulted in excessive taxation? If New Yorkers and Hawaiians want tax relief, instead of looking for a larger SALT exemption paid for by taxpayers in other states, they should vote for leaders who will cut their state and local taxes, and implement policies that alleviate their regulatory and entitlement burdens to allow that.

That's about it for the tax provisions. No tax increase for billionaires, or pretty much anybody else. Just avoiding a big tax increase for everybody who makes more than about $13,000.

Now, what about everybody losing their health care? Well, that's about changes to Medicaid, the federally funded health care program for those who can't afford health care.

Look, all they're trying to do there is tighten up the program so the people who are currently abusing the system can no longer do so, because you and I are paying for them to get free health care when they actually shouldn't qualify. I won't go into all the details, but here are the two most egregious abuses, and what the bill would do to address them.

The first is that there are a lot of people who apply for Medicaid saying they can't afford health care, but the fact of the matter is that if they'd just get a job, they could pay for Obamacare, or get health care through their employer. In other words, they're physically and mentally capable of working, they just don't want to, because they can game the system and get free stuff, like Medicaid.

So the bill would require that if someone is able to work, they have to either work or perform qualifying community service for at least 80 hours a month (that's less than 20 hours a week, people), and they qualify for full Medicaid benefits. They just have to document it. That's it.

The bill isn't going to kick anyone off Medicaid who isn't physically or mentally able to work. This provision is just intended to get the deadbeats off the rolls, so you and I aren't bankrolling them any more. Right now, they're our dependents, whether we like it or not. I don't know about you, but I'm ready to disown them.

The other abuse is one that's aided and abetted by numerous law firms across the company. Let's say that Pops passes away, and Ma needs to be moved into a care facility (or the kids just want to put her in one). But those facilities aren't cheap, so the kids want you and me to help them pay for it. They put Ma on Medicaid to pay for the care facility. Meanwhile, the kids keep Pops and Ma's palatial house, which is worth a small fortune.

There are law firms that specialize in helping families arrange this in order to keep the estate intact. The proposed bill would end the practice by denying Medicaid to anyone who owns a home worth more than $1 million. I believe that's fair, don't you? If someone owns a home worth a million bucks, they can probably afford insurance. If they have to move into a care facility, they can bloody well sell the house - they don't need it any more, and the kids can make their own way in the world.

So again, when the Democrat lawmakers say that the bill would take health care away from millions of Americans, I believe they're lying. I qualify this one with the term "I believe," because I doubt there are millions of people on Medicaid who are able to work but just don't want to and are gaming the system, plus more who are in care facilities but own homes worth more than a million bucks.

But if there are, that just makes passing these provisions all the more urgent. If having our debt downgraded doesn't provide an incentive to get our fiscal house in order, I don't know what will.

Lesotho, the China Strategy, and the Lingering Risks

A few weeks ago, I was scratching my head over the Trump administration’s tariff plan. The reason?

Lesotho.

I did some digging and found that we export just $3 billion to Lesotho. I wasn’t surprised; Lesotho’s GDP is just $2 billion, and its poverty rate is high. I asked ChatGPT  what we sell them: delivery trucks, vaccines, and food processing equipment.

I thought, why are we crushing Lesotho with a 50% tariff? It still looked like the end game might be about balancing trade deficits. But we couldn’t possibly get Lesotho to import another $230 billion worth of goods from us. And I assumed that they were just selling us diamonds, their largest export, which I knew we can’t mine in the U.S. It just didn’t make sense.

I decided to see how much we make off the diamond trade – I knew we imported rough diamonds and exported finished diamonds. I was surprised to learn that we’re the second-largest exporter of finished diamonds. But when I learned that we only import about $172 million worth of diamonds annually, knowing that we import more than $230 billion worth of goods from Lesotho, I wondered what else we buy from them.

Again, I asked ChatGPT. The answer: primarily textiles, but also electronics, machinery and equipment. I thought, “What electronics, machinery and equipment can a poor country like Lesotho manufacture that the U.S. would want to buy?” Having been to poor countries in sub-Saharan Africa, I couldn’t picture modern factories there producing those kinds of goods. Once again, I asked ChatGPT.

The response was primarily components that we assemble into finished products like computers and phones, or parts for things like boilers and nuclear reactors. Nuclear reactors? Computer components?

Knowing that China has made significant investment in many poor African nations, particularly those rich with natural resources, I asked, “Does China invest in Lesotho?” The answer?

“Yes, China has been a significant investor in Lesotho, contributing to various sectors including infrastructure, agriculture, and manufacturing … Chinese enterprises dominate Lesotho’s textile industry, owning 35 out of 41 factories. These factories employ over 40,000 workers and are a major source of export earnings.”

Bingo. That’s when I realized the punitive tariff on Lesotho was part of a strategy related to China.

Lesotho, I learned, is part of China’s Belt and Road Initiative (BRI). To summarize the BRI, it is central to China’s plan to undermine America’s global influence and economic dominance, undercut our trade alliances with other countries, end the dollar’s role as the global reserve currency, and become the new dominant superpower.

Through the BRI, China has made investments in countries large and small throughout Africa and Asia, but also Europe and Latin America. Its key objectives are to increase trade and investment between China and participating countries (but also shift production from China to other countries to expand trade beyond BRI participants); build infrastructure like roads, railways, ports, pipelines, and digital networks (the latter of which can be used to facilitate cyber-espionage); and expand China’s global influence through economic partnerships.

There are two main components: the Silk Road Economic Belt, a series of overland routes connecting China with Central Asia, Russia, and Europe; and the 21^st Century Maritime Silk Road, sea routes linking China to Southeast Asia, Africa (where more roads and railroads are being built), and Europe via major ports.

Projects include roads, power plants, fiber optic cables, and the Gwadar Port in Pakistan, a key strategic gateway to the Persian Gulf; railways in Laos, Indonesia, Kenya, Ethiopia, and Europe; the Piraeus Port near Athens, Greece; and energy projects in Argentina.

Criticisms have included debt trap diplomacy (China burdens countries with unsustainable debt to gain political leverage); lack of transparency and environmental standards; safety issues and project failures; and most importantly, geopolitical motives that transcend economics.

Imagine if the BRI is successful long-term. What if China replaced us as the largest shareholder in the IMF and the World Bank, and thereby could impose sanctions on other countries for alleged bad behavior and promote economic policies that align with its interests? China could sanction the U.S. for any false allegation it chose to levy, and use its influence to leverage BRI countries to support those sanctions. We could be cut off from exporting oil, or have to give up our nuclear arsenal, or have to close military bases in foreign countries.

This is not the stuff of tin foil hats. The BRI is about dominance over the U.S., but not through direct confrontation. It’s about replacing U.S. leadership in global finance by using yuan in BRI loans and trade. (China has recently done major energy deals trading in yuan.) It’s also about replacing our leadership role in technology (5G, AI) and infrastructure (ports, railways, energy). Ultimately, China wants to create a world where China, not the U.S., makes the rules, where other countries turn to Beijing, not Washington. It’s the 21st century Cold War.

Is there a military component? Not overtly (yet). However, the building of strategic ports (dubbed the “String of Pearls”) can be used for refueling, resupply, or as future naval bases. And China already has its first foreign military base in Djibouti. Its navy is expanding blue-water capabilities. The BRI has a “Digital Silk Road” component that has installed Chinese-controlled communications networks in several countries that can facilitate espionage or information control, which can be used for military purposes.

What does this have to do with the tariff plan?

I believe that the Trump administration wants to derail the BRI, and the tariff plan may be central to that.

There are two threats to King Dollar: Triffin’s Dilemma and the BRI. The tariff plan can resolve both. Here’s how it might play out with regard to the BRI.

Many companies are already deploying a “China+1” strategy, diversifying manufacturing out of China and into countries like India, Vietnam and Mexico. That’s increasing due to the tariff plan; Apple is planning to move more production to India. This will reduce dependence on China, slow its growth, and reduce its leverage.

As we forge key trade partnerships, especially for strategic industries like semiconductors, pharmaceuticals, rare earths, and defense manufacturing, we further reduce dependence on China, while continuing to encourage domestic investment in those sectors.

We restrict the transfer of technology to China. We’ve already banned high-end chip exports, limited AI hardware and software sales, and blocked Chinese investment in strategic U.S. companies, and we’re tightening further. Other countries like Japan and the Netherlands are joining the effort.

We can start targeting BRI countries, especially in Africa and Asia. Indonesia, Malaysia, and Lesotho are nations with BRI ties that are already in trade talks with us. Other countries with looser BRI ties, like Vietnam, are also in talks with us. Vietnam recently imposed its own anti-dumping tariffs on China, fearful that with the U.S. market effectively closed, China would turn to them as a place to dump cheap goods.

How is a country like Lesotho important in all this? It’s a domino effect. That 50% tariff would crush Lesotho. So, in spite of the heavy investment by China, Lesotho is clamoring for a trade deal. The U.S. is its third-largest export market – it sells nearly ten times as much in goods to the U.S. as it does to China, so it’s in its best interest to move our way.

If Lesotho inks a deal with us, other small African BRI countries might follow, like Botswana, or Eswatini (the only African country that recognizes Taiwan), or … Djibouti, home of China’s sole foreign military base. There’s a Cold War parallel here: U.S. success in Grenada and El Salvador in the early ‘80s was a sign that the USSR might be vulnerable.

This might then pressure mid-tier, regionally important BRI partners like Kenya, Vietnam, and Indonesia through things like strategic investment offers or debt relief packages contingent on limiting Chinese projects. Another Cold War parallel: Poland’s Solidarity movement showed that resistance was possible, and other countries followed.

The end game would be to slow or reverse BRI expansion. Countries might begin to default on China-backed debt, and China’s vision of a new global order could stall out, much as the USSR collapsed without direct military conflict with the West.

Now, it could very well be that the end game is nothing more than trade deals. But given what’s happening with the Panama Canal negotiations (wresting control from China), returning the U.S. military to a position of combat readiness and modernizing materiel like fighter jets, looking at strategic geographic alliances with countries like Canada and Greenland (I don’t believe we really want to “own” them, I believe the objective is to form EU-like trade and security partnerships), and the focus on rare earths, it seems like the tariff plan may be part of a larger plan as it relates to China.

Lesotho is the 164^th-largest economy in the world, ranked by GDP. China is second-largest. But there may be a strategic link between the two, and it may have started with a 50% tariff on one of our smallest trading partners.

Either way – whether or not the tariff plan is about disrupting the BRI – the China piece of the puzzle is about more than just trade. At a minimum, it’s also about addressing all of China’s other misbehavior, like IP theft, espionage, other unfair trade practices, etc. It’s also about reducing dependence on China for key infrastructure manufacturing.

I believe that the trade agreements with key strategic partners will get done within the 90-day “pause.” If not, it’ll be extended. In the meantime, I believe de-escalation with China will continue, because the current situation is unsustainable. And I believe a deal will get done with China before year-end.

There are two lingering medium-term risks, and by medium-term, I mean through 2028. The first is the risk that, even though we’ll have forged new agreements with our trading partners, the nature of the rollout and the persistent comments about being “ripped off by friend and foe” will damage relationships and undermine trust. It may be that this was all part of the broader China strategy, and key trading partners were clued in behind the scenes that we’d use that tariff calculation and accuse them of “ripping us off.”

I don’t believe that’s the case; someone would have leaked. I also don’t believe the President was thinking that strategically. I believe this is just another example of his often ham-handed rhetoric. (Fed Chairman Powell would agree.)

The other risk is that the market has lost some confidence due to its perception of an erratic process of executing and communicating the strategy. As one respected business commentator put it, it’s like we’re all in a pickup truck cab, and President Trump is driving down a bumpy dirt road after dark with the headlights off. No one can tell where we’re headed, but he’s saying, “Don’t worry, I’ve got this, I know where I’m going.” But everyone is still worried.

That could result in an “uncertainty discount” in the market throughout the remainder of his term: even though the market will recover, it may not go as high as it otherwise could, because it may price in an allowance for uncertainty over what the administration might do next. Time will tell.

The Trump 2.0 Tariff Plan: the Rollout and the End Game

We’ve defined tariffs and trade deficits, examined why we run trade deficits as the issuer of the global reserve currency, and discussed why and how tariffs are used. Before we get into the current administration’s tariff plan, I want to get something out of the way.

I generally try to remain politically agnostic when discussing economics. As such, I avoid showing my cards in terms of my political leanings. I have friends across the political spectrum. Some of my liberal friends hate everything President Trump does, and believe he and his team don’t know what they’re doing. Some of my conservative friends support everything he does, and seem to believe he can do no wrong.

I’d never agree with everything any political leader does. I call balls and strikes. When I believe a President’s policies are good, I’ll say so, and when I believe they’re bad, I’ll say that, too. I say this to establish that any criticism I make of the current tariff plan isn’t partisan, as is the case with most who criticize it. It has to do with economics, pure and simple.

I’ll also say this about President Trump, Treasury Secretary Bessent, Commerce Secretary Lutnick, and Counselor to the President Navarro. You may disagree with them. You may dislike them. You may even hate them. But it’s ridiculous to say they don’t know what they’re doing. These are four highly educated men, three of them very successful businessmen, one an economist. They understand trade policy better than you or I do.

On to the tariff plan.

When those four men walked out to the Rose Garden after the market closed (a wise strategic choice) on April 2 with the now-infamous tariff chart and announced the plan, my hair caught on fire, like so many other market observers and economists. (As a good friend put it, it was a very small fire.) Part of that had to do with the fact that I looked at equity futures and considered what my IRA balance was going to look like the next day.

But part of it had to do with the fact that the administration misrepresented the tariff rates that those other countries charge us – it was a complete fabrication. And I’d prefer they’d have told the truth.

By now this is pretty common knowledge, but let me explain how they came up with the “tariff rates” they claimed other countries charge on our exports. I’ve mentioned President Trump’s decades-long obsession with trade deficits, which he himself admits. They took each country’s trade deficit, and divided it by that country’s exports of goods to the U.S. (They ignored services altogether.)

Let’s return to the example of tiny Lesotho, with which we had a $234 billion trade deficit last year, resulting from exports to Lesotho of just $3 billion subtracted from imports from Lesotho of $237 billion. They divided the $234 billion trade deficit by Lesotho’s exports to the U.S. of $237 billion and came up with a “tariff rate” of 99%. They then claimed that for each country on the list, they would be “lenient” and only charge “half” of what that country purportedly charges the U.S. So in Lesotho’s case, they applied a reciprocal tariff of 50%.

The truth is that Lesotho’s Most-Favored-Nation (MFN) trade-weighted average tariff rate is 11.2%. A 50% tariff rate on imports from the tiny African country would dwarf what it charges its trading partners, and would crush its economy. The U.S. is its third-largest export market, representing nearly 20% of its exports.

The fact of the matter is that no one calculates tariff rates the way the Trump administration did. No one has ever calculated tariff rates that way. No one could find any examples in the economic literature of tariffs being calculated that way.

Tariffs are calculated in one of two ways: either a unit tariff, which is a fixed charge per unit (e.g., $1 per bushel of wheat) or an ad valorem tariff, which is a percentage of the value of the goods being imported (e.g., 5% of the price of each imported vehicle). These can be combined into a compound tariff (e.g., $100 per vehicle plus 5% of its price).

But again, no one – no one – calculates tariffs by dividing the trade deficit with a country by the imports from that country.

When the administration presented those numbers, the reaction was immediate. Equities tanked. Trading partners were shocked. And economists and market pundits thought that Trump, Bessent, Lutnick and Navarro didn’t know what they were doing.

In hindsight, I believe they did. Let’s illustrate one reason.

Consider Vietnam. Vietnam’s trade deficit with the U.S. in 2024 was $123 billion, on exports to the U.S. of $136 billion and imports from us of $13 billion. By the administration’s calculation, that amounts to a “tariff rate” of 90%. So we announced a “lenient” reciprocal tariff of 46% on Vietnam.

Vietnam’s actual trade-weighted MFN tariff rate? 5.3%.

Shortly after the tariff plan was rolled out, Vietnam offered to cut its tariff on exports to the U.S. to zero. While no deal has yet been made, I believe this gives us a peek into part of the strategy behind using the draconian calculation of other countries’ “tariff rates” on the U.S. and then cutting those in half to come up with a “lenient” retaliatory rate that is actual extremely punitive.

President Trump prides himself on his negotiating prowess. After Vietnam offered to drop their tariff rate to zero, some conservative commentators heaped praise on his deal-making ability, stating that he’d gotten Vietnam to drop its tariff rate from 90% to zero! In reality, they’d gone from 5.3% to zero, a pretty painless sacrifice when faced with a 46% tariff from your largest export market. Deals like this would paint a picture of the President as the consummate dealmaker.

(It should be noted that Vietnam is also a China proxy. As U.S. imports from China have trended downward, Vietnam’s exports to the U.S. have increased, in part due to China shifting production into its fellow Communist neighbor to the south. And Vietnam, like China, has been guilty of currency manipulation, dumping, unfair subsidies, IP theft, and cyber-espionage. So there are other reasons to impose high tariffs on Vietnam besides trade tit-for-tat.)

While I’m not a fan of the calculation used, and I think there are associated medium-term risks, I believe it was strategic for reasons beyond the President’s ego. But let’s turn to the likely end game. There are three possible scenarios, and two are implausible.

The first is that these are broad, long-term tariffs aimed at permanently eliminating trade deficits and completely re-shoring manufacturing. I’ve already addressed the damage that would cause to our status as the global reserve currency. It’s also impossible, but even if it weren’t, it would take decades. Little progress would be made during President Trump’s term, so he wouldn’t have an opportunity to take a victory lap for his policies, and he loves taking victory laps. The economic fallout would also likely hand the White House to a Democrat in 2028, who would surely reverse the tariff policy. This obviously isn’t the end game.

The second scenario – I actually saw this floated, and not by conspiracy theorists – is that the administration was trying to tank the stock market to drive a flight to quality (Treasuries), driving bond yields down. With $9 trillion in debt coming due in 2025, each basis point of yield is worth $1 billion in borrowing cost. So when the ten-year yield dropped 20 basis points, that would have saved $20 billion.

Two problems: one, that’s a drop in the bucket, even if you combine it with the tax cuts, savings from DOGE, lower energy costs, deregulation, revenue from tariffs, and other economic positives. And second, yields returned to where they were before the rollout or higher, negating any potential savings. This obviously wasn’t the plan.

The third possibility is that the plan all along was to use the flawed calculation of the “tariff rate” other countries charge us to justify the exorbitantly high reciprocal tariffs that were announced on those countries. Of course, we now know that after Treasury yields spiked by 50 basis points, when tariff hawk Navarro was away from the White House, the more diplomatic Bessent (who’s also responsible for refinancing the debt), accompanied by Lutnick, met privately with Trump and persuaded him to pause the reciprocal tariffs on all countries but China for 90 days.

At first blush, it appeared that the administration was bumbling through its strategy, making things up as it went along. However, there’s a good chance that the private meeting in which Bessent talked the President into the pause was more along the lines of, “The time for the pause is now,” rather than, “Gee, maybe we should think about a pause on the tariffs.” In other words, maybe a pause was part of the strategy all along; the timing of its announcement was the question mark.

So why use the phony “tariff rate” to justify those high reciprocal tariffs? To pressure key trading partners into coming to the table quickly to make trade deals.

I believe that the administration wants to quickly forge trade alliances with key partners like Canada, Mexico (through accelerated renegotiation of USMCA), the EU and member nations, Japan, South Korea, Australia, and India. Other countries like Israel are of strategic interest beyond just trade. The same is true of China proxy Vietnam, and other Asian nations like Taiwan, Thailand, Indonesia, Singapore, and Malaysia.

Further, I believe the administration wants to keep the pressure on China to isolate them while it makes these trade deals, to force them to eventually come to the table. The U.S. does not want China to strike a deal first, because, as Bessent said, “The first person that makes a deal gets the best deal.” And the strategy with China goes far beyond trade.

I don’t believe the U.S. necessarily wants to eliminate trade deficits with all those countries, because I believe that Trump, Bessent, Lutnick, and even Navarro understand what it means to be the issuer of the global reserve currency. I believe they just want a more level playing field, and reduced tariffs worldwide. Remember, the U.S. historically has charged lower MFN tariffs than most of its trading partners.

As far as re-shoring manufacturing, I don’t believe they’re too concerned about that. I believe it’s an objective to some degree. But I believe they’re just as interested in moving production of critical security and supply chain infrastructure from China to other countries. We know we can’t produce most things as cheaply in the U.S. as we can in China. But we can produce them just as cheaply in India or Singapore or Malaysia – and those countries don’t hate us. Key priorities include pharmaceuticals, technology, war materiel, and microprocessors.

Now, all of the countries I listed, and some others, are already negotiating with the U.S., and it’s likely that the first deals will be announced the week after I post this. So you may be saying, “Brilliant deduction, Captain Obvious.”

In my defense, I came to this conclusion two weeks ago. What tipped me off that this might be the end game?

Tiny Lesotho. And I’ll save that story for the last post in the series.

The Lawn Guy, the Chicken Tax, and Rice: More Tariff Talk

A good friend of mine, after reading the first two installments in this series of posts, asked me exactly the right question:

“Assume you’re the U.S., and your lawn guy is China. You (the U.S.) send lots of dollars to your lawn guy (China). In return, you get your lawn mowed (Chinese goods). So the U.S. has sent dollars to China, which you say is a good thing. Then why does an additional tax/tariff need to be applied on top of the dollars we’re sending them?”

The simple answer is that it doesn’t – tariffs are unnecessary, which is why I don’t like them. But it’s never that simple. Having defined tariffs, let’s dive into why they’re used.

There are two primary reasons tariffs were traditionally imposed on imports from other countries. The first was to generate revenue for the government imposing the tariff. In fact, the U.S. used tariffs as its primary source of revenue during most of the 18^th and 19^th centuries. That changed when the 16^th Amendment was ratified in 1913, which gave Congress the power to levy income tax. After that, the income tax became the main source of government revenue.

(Sidebar: if we would eliminate the income tax, I’d be a big fan of tariffs. A consumption tax, which is basically what a tariff is, makes far more sense to me than an income tax.)

The second reason is to protect domestic commerce. An example is the absurdly named “Chicken Tax.” In the 1960s, the U.S. was exporting large quantities of cheap chicken to Europe, undercutting domestic poultry production. So some European countries imposed tariffs on U.S. chicken exports. In response, President Johnson imposed a 25% tariff on some imported goods from Europe, including light trucks (aimed primarily at VW).

Later, the light truck tariff – still in place today – was expanded to include other countries, including Japan. This helped protect the U.S. auto industry from cheaper imported trucks (and the original “chicken tax” protected European poultry production).

Another example of a protectionist tariff – and it’s a perfectly rational one – is Japan’s rice tariff. The Trump Administration claimed that Japan imposes a 700% tariff on U.S. rice exports. That’s misleading. Japan has a tariff-free import quota for rice. For imports above that amount, it does charge a steep tariff, which got as high as 700% several years ago, but based on recent rice prices, it’s “only” about 400%. Still, the Administration used the higher figure for effect. Also, while the U.S. is a significant exporter of rice to Japan, it generally stays within the tariff-free import quota, so it avoids paying any tariff at all on rice exports to Japan.

Why does Japan charge such a high tariff on rice? Rice farming is very important to Japan’s agriculture sector, and to its culture, because rice is a major food staple in Japan. Japan consumes more rice than it can produce. However, Japan’s rice production is declining due to increased urbanization and a declining rural population. Also, its rice farms are quite small compared to other rice-producing countries. The average U.S. rice farm is more than 100 times the size of the average Japanese rice farm. Without Japan’s tariffs, countries with greater efficiencies and economies of scale like India or Thailand, the largest rice producers, could flood the Japanese market with cheap rice, destroying a key component of its ag sector.

That brings us to another important point: Japan imposes that tariff on all countries it buys rice from. In fact, virtually all countries impose the same tariff rate on all their trading partners under the Most-Favored-Nation (MFN) principle of the World Trade Organization (WTO). One exception to this is negotiated free trade agreements, like the U.S.-Mexico-Canada Agreement (USMCA) or the EU’s single market. These allow countries to have more favorable trade conditions with their partner countries without violating the MFN principle.

Retaliatory tariffs are another exception, and the retaliation may be for dumping goods at below-market prices or other unfair trading practices. Another exception to the MFN principle is tariffs used as a negotiating tool, but let’s revisit that later.

Other than these exceptions, tariff rates are applied uniformly to all trading partners under the MFN principle. If other countries are “ripping off” the U.S. based on the tariff rates they charge, then they’re ripping off every other country they trade with, too. And if all of these countries are charging each other tariffs to the extent that they’re all ripping each other off, you’d think a global trade war would have ensued a long time ago. (At issue is the fact that while the U.S. did impose tariffs prior to President Trump, our tariff rates were generally much lower than other countries.)

I mentioned that President Johnson used tariffs to retaliate against Europe’s “chicken tax,” and that retaliatory tariffs are an exception to the MFN principle. That’s a good clue as to a third use of tariffs besides revenue and protectionism: retaliation. We’ve already talked about that, and we’ve seen it play out in real time in recent weeks between the U.S. and China. I believe that part of the exceedingly high tariffs against China have to do with things other than their unfair trade practices, but we’ll get to that later (sorry to jump around, but I don’t want to go down too many rabbit-holes).

Now let’s talk about tariffs as a negotiating tool, the fourth use case. That can apply to trade – to bring a trading partner to the table to negotiate a better trade deal, improved market access, maybe a free trade agreement like USMCA. Or it can apply to some other policy priority.

During President Trump’s first term, he threatened an escalating tariff against Mexican imports unless Mexico gave him what he wanted on illegal immigration through Mexico from Central America. After negotiations, Mexico agreed to assist with limiting the flow of migrants through its country to the U.S., and the tariff was never imposed.

President Trump used similar tariff threats earlier this year against Canada, Mexico, and Venezuela to gain cooperation on border security, fentanyl trafficking, and repatriation of illegal immigrants from Venezuela. In each case, those countries agreed to terms, and the tariff never materialized. So the U.S. is able to use its considerable economic clout to gain assistance from trading partners in achieving policy objectives unrelated to trade.

Okay, now let’s talk about some of the other possible reasons for the high tariffs on China. First, there’s theft of intellectual property. Remember the recent DeepSeek AI chatbot that China rolled out? It was claimed that it was just as good as ChatGPT, but that it took a fraction of the development time and budget. (Those claims have since come into question; the development cost may actually have been much higher – imagine, China lying to the rest of the world.) Well, when some smart tech people tested DeepSeek and asked it to identify itself, it sometimes identified itself as ChatGPT.

While there’s no definitive proof of IP theft, the fact that the model identified itself as ChatGPT more than half the time suggests that its training data probably included ChatGPT-generated text, which violates ChatGPT’s terms of service.

That’s just one of thousands of examples. China also spies on the U.S. and other countries. Remember the spy balloon? And they recently admitted hacking into some of our key infrastructure. (You’re worried that DOGE may have your Social Security number? Look east, young man.) China copies our technology and sells products using that technology back to the U.S. Our companies can’t sue Chinese companies, because we don’t have access to their courts. But they have access to our courts, so they can sue our companies. Chinese companies operating in the U.S. don’t have to comply with Generally Accepted Accounting Principles (GAAP). They restrict access to our markets for exporters and investors, but they manufacture, sell, and invest here.

Get the picture? The playing field isn’t level.

Let’s go back to my friend’s analogy. It doesn’t make sense for me to charge my lawn guy (China) a tax just on the basis of the trade deficit I run with him, because of the exorbitant privilege I enjoy from not having to mow my own lawn.

But what if I found out that every time he mowed my lawn, he was stealing from me? Peeking into my windows and spying on me? Cheating me in other ways? What if he ultimately wants to take over my house? You can be sure that I’d restrict him from being able to mow my lawn anymore, at least until he changed his ways. (Actually, I’d fire him for good, but let’s go with the analogy.)

That’s basically what the U.S. has done by hitting China with a 145% tariff: we’ve imposed a trade embargo. China can’t trade with the U.S. at that level. And the U.S. can’t trade with China given the 125% retaliatory tariff they’ve imposed on us. Something’s got to give.

I’m going to end with a discussion of what effect tariffs have in the context of “King Dollar,” and I’ll wait to address the specifics of the Trump Administration’s plan in the next post.

Strategic, temporary tariffs used as leverage in trade negotiations to open foreign markets and target behaviors like dumping, IP theft, currency manipulation, and state subsidies can enhance long-term U.S. competitiveness without having an excessive adverse impact on global dollar circulation. The result can be new free trade agreements, and bilateral elimination or reduction of tariffs.

However, broad, long-term tariffs aimed at permanently reducing trade imbalances to re-industrialize will shrink the flow of dollars globally and weaken reserve status. The way it works is that those tariffs reduce imports, resulting in fewer dollars flowing abroad. This leads to less dollar liquidity for central banks to hold in reserve, for global trade to be settled in dollars, and for foreigners to buy U.S. assets.

That reduces the dollar’s status as a reserve currency, especially if other countries step in and try to create an alternative. The problem is that there is no viable alternative that could replace the dollar in the foreseeable future, so global financial markets could collapse. Even if there were a viable alternative, if the U.S. lost its status as the global reserve currency, it would also lose all of the benefits thereof, and it would take decades to re-industrialize, if it ever could, given the current regulatory framework, cost of labor, etc. We would no longer be the dominant economic player on the world stage, and we’d lose our geopolitical clout. Who would have the strength to impose sanctions on the bad actors? The world would be much less safe.

In summary, targeted, temporary tariffs can be a powerful tool in addressing Triffin’s Dilemma and increasing fairness in global trade. But broad, long-term tariffs cause far more harm than good. And that should provide some clues as to what’s coming in the next post.

King Dollar, Triffin, and the Exorbitant Privilege

This post is going to focus on reserve currencies and why countries run trade deficits; the benefits that accrue to the issuer of the global reserve currency; and the tension that can produce. But first, a bit of history.

Prior to WWI, the British pound sterling was the world’s reserve currency (meaning that most global trade was conducted in pounds), and London was the financial center of the world. Then WWI and WWII came along. Britain had spent its industrial dominance building (and depleting) its war machine, it had taken on heavy debt defending itself, and it had been bombed mercilessly by the Germans, requiring extensive rebuilding. Meanwhile, the U.S. emerged from WWII with half the world’s gold reserves, a massive industrial base, and little physical destruction at home.

Thus, in 1944, the Bretton Woods Agreement formalized the dollar’s role as the world’s reserve currency, linked to gold, and the pound was forever replaced in that role. President Nixon decoupled the dollar from gold in 1971 to stop other countries, which had rebuilt after the war and were now running trade surpluses with the U.S., from exchanging their dollars for gold and thus draining U.S. gold reserves. (This began the era of floating exchange rates and fiat currencies, but that’s another story.)

It’s in the U.S.’ best interest to maintain the dollar’s status as the global reserve currency, for several reasons. The first is cheaper borrowing costs. Global demand for dollars and Treasuries keeps U.S. interest rates lower than they would otherwise be. For that reason, the U.S. can borrow more cheaply than any other country. And when we need to conduct emergency borrowing, as we did during the 2008 financial crisis and the covid pandemic, when we issued trillions of dollars of new debt at very low interest rates, we have a competitive advantage over other countries affected by those crises.

Second, we can run persistent trade deficits without facing a crisis (up to a point). We can import more than we export and pay with our own currency without facing capital flight. (We’ll explore this more later.)

Third, we wield considerable geopolitical power. We can impose financial sanctions on countries like Russia and Iran, enforce those sanctions through control of dollar clearing systems, and influence global finance through institutions like the IMF and the World Bank. As the largest shareholder in those institutions, we can maintain the dollar’s dominance and promote economic policies that align with our interests.

And finally, we enjoy global seignorage, which in effect allows us to obtain zero-interest loans from other countries that trade in dollars. Here’s an example: the Fed creates $100 billion, at minimal cost. Those dollars flow abroad in one of several ways: a foreign government buys U.S. Treasuries, or a company in Europe keeps dollars to pay for oil, or tourists use U.S. cash abroad and it never comes back into the U.S.

In return, the U.S. gets real goods, services or financial assets in return. For example, Americans buy cars from Europe or oil from the Middle East. The other countries accept dollars and hold them rather than converting them back into their own currency or demanding U.S. exports. The dollars may sit in foreign central bank reserves or be used as trade currency elsewhere. Globally, about $7-8 trillion in physical and digital U.S. dollars is held outside the U.S., much of that amount never returning home.

Because the U.S. issued those dollars at little to no cost and received real value in return, we’re effectively importing goods and services from the rest of the world, in exchange for paper or digital currency that the rest of the world is content to hold and not redeem. It’s like writing IOUs that are never cashed in, and that we don’t pay interest on. That interest-free loan is estimated to be worth as much as tens of billions of dollars a year, plus demand for Treasuries – especially during times of crisis – keeps U.S. borrowing costs lower than they would be otherwise.

That global seignorage is what former French President Charles de Gaulle grumpily called the U.S.’ “exorbitant privilege.” But that privilege comes with a cost. It contributes to persistent U.S. trade deficits, as other countries are more than happy to sell us goods and services in exchange for the dollars they hoard. This can eventually lead to overvalued currency and, ultimately, erode confidence in “King Dollar.”

Now we’re getting to the crux of the matter of why we run persistent trade deficits: it’s in our best interest to maintain the dollar’s primacy as the global reserve currency; we don’t ever want to lose that. To do so would be to lose our pre-eminent role in the global economy, as Britain did in 1944. But before we explore that, let’s look at a micro-level example of the “exorbitant privilege,” which may help better grasp how this plays out.

Recall the examples of the persistent “trade deficits” that I run: I pay someone to mow my lawn, cut my hair, groom my dogs. I pay restaurants to prepare meals for me. On a less persistent basis, I pay airlines and cruise lines; these expenditures are larger, but derive a greater benefit for each transaction. I pay for these services to enhance my quality of life – I’m spending my own currency in ways that bring me greater value in the form of time, enjoyment, and experiences.

In economic terms, I’m functioning like a micro “global reserve currency” because I’m able to make these transactions and reap the benefits, similar to the way the U.S. dollar is used globally as a reserve currency: other countries trade with us because the dollar holds inherent value, and we enjoy the privilege of being able to run trade deficits with little consequence. Likewise, my dollars have value to the entities with which I trade, and I’m able to enjoy the goods and services they provide with little consequence (as long as I don’t overspend).

My “exorbitant privilege” comes from being able to spend my (relative) wealth in a way that enriches my life, so even if I incur a “trade deficit” in a monetary sense, the return on my investment is substantial in terms of my well-being. Make sense?

Okay, so here’s the issue with being the issuer of the world’s reserve currency – “King Dollar”: in order to supply the world with dollars, the U.S. must run trade deficits. In other words, we must import more than we export, so that more dollars flow outside the U.S. than other currencies flow in. This allows foreign central banks and institutions to acquire dollars for trade and reserves. However …

If we run persistent and excessive trade deficits, we risk undermining global confidence in the dollar, which could lead to inflation, devaluation, or a run on dollar-denominated assets.

This happened after the Bretton Woods Agreement, when the U.S. had to supply dollars to the rest of the world to support trade and investment. But as dollar reserves accumulated abroad, concerns grew that we didn’t have enough gold to back all of those dollars. That led to a crisis of confidence in the dollar, which was what led Nixon to end the convertibility of dollars to gold.

This conundrum – the fact that we have to run trade deficits to maintain “King Dollar,” but we can’t let those deficits become so large and persistent as to erode confidence in the dollar and thereby threaten its supremacy, became known as the “Triffin Dilemma,” named for economist Robert Triffin, who explained it in testimony before Congress in the 1950s while addressing the sustainability of the Bretton Woods system.

Today, the U.S. finds itself once again running very large and persistent trade deficits, and …

I believe that addressing the Triffin Dilemma is the over-arching goal of the Trump Administration’s tariff strategy.

Now, a naturally occurring consequence of being “King Dollar” is that by running trade deficits to supply the world with dollars, we undermine domestic manufacturing over time. This leads to gradual deindustrialization, a decline in blue-collar manufacturing, globalization of the supply chain, and a more service-based economy. It’s not that the U.S. has intentionally decimated the factory sector; it’s a naturally occurring consequence of being the global provider of liquidity. All this talk about “bad policy of previous administrations shipping manufacturing jobs overseas” is just a populist political talking point, one that’s used by both parties.

Economists like Triffin and even former Fed Chair Paul Volcker, who rescued the U.S. from the stagflation of the 1970s, understood this. Volcker said, “A global reserve currency has to be available in sufficient quantities, and that availability inevitably involves running balance-of-payments deficits.” And running balance-of-payments deficits means importing more than you export, which will naturally result in deindustrialization. You can’t have both a strong, export-led, manufacturing economy and be the issuer of the global reserve currency, at least in the long run.

So should we re-industrialize entirely, and sacrifice the status of “King Dollar?” Absolutely, unequivocally not. Doing so would mean giving up all of the benefits that accrue to the U.S. due to the dollar’s supremacy: seignorage, considerable geopolitical clout, and perhaps most important of all, low borrowing costs, especially during times of crisis. Those things are of far greater value to the U.S. than manufacturing dominance – just ask Britain.

But if our deficits get out of control, couldn’t China eventually overtake us and become the issuer of the global reserve currency? Not a chance.

Even though China is the world's second-largest economy and top exporter, the yuan faces huge structural barriers to reserve currency status. First, China strictly controls capital flows into and out of the country. You can’t have a true reserve currency if other nations can’t freely move money in and out of your system. Second, the yuan isn’t backed by an independent judiciary, a transparent regulatory regime, or a stable political system. Global investors don’t trust the CCP to keep the rules consistent.

Third, the yuan is only partially convertible. It doesn’t trade freely like the dollar, euro, pound, or yen. This makes it unreliable for reserves or large-scale trade settlement. Fourth, global reserves are parked in liquid, safe assets, with U.S. Treasuries being the gold standard. China’s bond markets aren’t nearly as liquid, or accessible. And finally, other countries simply don’t want to be dependent on China, given its track record on things like debt diplomacy, technology control, market access, censorship, spying, and IP theft.

As for any other country’s currency replacing the dollar, no other country is even close in terms of the size of its economy. U.S. nominal GDP is more than $30 trillion, nearly doubling China’s at less than $20 trillion. The third-largest economy in the world is Germany, with nominal GDP of less than $5 trillion. India is fourth, but if California were a country, it would hold that position.

That’s enough for this post. The next post will address some issues with tariffs in general and the administration’s tariff policy. If space allows, I’ll get into the possible end games, and the most likely one; if not, I’ll save that for a final post.

A Primer on Tariffs and Trade Deficits

For obvious reasons, there’s been a lot of talk about tariffs over the past several weeks, since President Trump rolled out his tariff plan on April 2. (It seems a lot longer ago than that, doesn’t it?) I’ll weigh in with my thoughts on the plan; the good and the bad; what I believe the end game is, including possible other scenarios and why I believe they’re not likely; and what I believe are the key risks regardless of how it plays out.

But first, a couple of posts are in order to lay the foundation for further discussion. It’s a complex topic, and rather than inundate readers with one of my trademark “War and Peace” length posts, I thought I’d be kind and break this into more manageable chunks (assuming you consider nearly 2,000 words “manageable”). So let’s start with some basic definitions, because from some of the comments I hear, a lot of people don’t really understand what tariffs are, what they’re used for, and who actually pays them.

And because President Trump is obsessed with trade deficits, I also want to address that topic on a fundamental level, since it appears to be equally misunderstood. In the next installment, I’m going to delve into trade deficits in more detail, and that post may be the most important one in truly understanding what all of this is about.

In general, as a free-market monetarist, I’m not a fan of tariffs. When I’ve remarked that I don’t like this tariff plan, I’ve had friends ask me, “What’s wrong with us slapping tariffs on countries that have been charging tariffs on the U.S.?” That question may indicate a misunderstanding of what a tariff is. (I say “may,” because it could be that the person who asks it is just playing fast and loose with the wording of the question.)

The textbook definition of a tariff is that it’s a tax on the importer of a good (or service) from a foreign country. It is not a tax on another country itself. The U.S. doesn’t have the authority to impose a tax on another sovereign country. So when the headlines say that the U.S. is charging China a 145% tariff, they’re misrepresenting the facts.

What’s actually happening is that the U.S. is charging a tariff, or import tax, on any company that imports goods into the U.S. from China. That could be a Chinese company, like AliExpress, which is kind of the Chinese version of Amazon Marketplace. AliExpress aggregates a bunch of smaller Chinese sellers who sell goods through its platform to U.S. consumers. So the tariff would be charged to AliExpress. Then it’s up to them to either absorb part or all of the tariff, or pass it along to its sellers, who also have to decide whether to absorb part or all of it, or pass it along to their U.S. consumers.

I can guarantee you that given the magnitude of a 145% tariff, AliExpress and its sellers are going to pass that tariff along to the U.S. consumers, in the form of higher prices. So that $15 shirt you buy from AliExpress is going to cost more than double that amount.

(Note that this example is overly simplified for illustrative purposes.)

Another possibility is that the tariff is applied to a U.S. company. Apple builds their iPhones in China and ships them to the U.S. to sell them here. So they’re importing the phones from China. Thus they, too, would be charged a 145% tariff, even though they’re an American company. (And they, too, are going to pass a tariff that large on to their customers, who are now going to pay a whole lot more than $1,600 for an iPhone – except that President Trump granted an exemption for electronics coming in from China, and is now only subjecting them to the 20% “fentanyl tariff.” Are you confused yet?)

Actually, there’s a third form of tariff. Have you ever traveled abroad, or gone on a cruise and visited a foreign port, and bought souvenirs? You bring them home, and when you clear Customs, you have to declare what you bought and how much you spent. If it’s more than the duty-free exclusion (currently $800 per person with some conditions), you have to pay a duty on the amount you spent above the exclusion.

That duty is a tariff. So if you ever declared more than the exemption and paid a Customs duty, you paid a tariff for importing goods into the U.S. Congratulations.

Now that we’ve cleared up what tariffs are and who pays them, let’s turn our attention to trade deficits. A trade deficit occurs when one country (or entity) imports more from another country (or entity) than it sells to that country. For example, the U.S. imported about $439 billion worth of goods from China last year. (I know I’m picking on China – but hey, so is President Trump.) We exported $144 billion worth of goods to them. So our trade deficit with China was about $295 billion.

If we export more to a country than we import from them, we run a trade surplus with that country. (China runs a trade surplus with us; for every country “A” that runs a deficit with a country "B,” country “B” runs a surplus with country “A.”) Our largest trade surplus in 2024 was with the Netherlands; we exported $124 billion to them, and imported just $51 billion from them, resulting in a surplus of more than $70 billion. Love that gouda cheese.

Note that I said that countries or entities can have trade deficits and surpluses. Although the data isn’t readily available, individual states have deficits and surpluses with each other (and you don’t see them threatening each other with tariffs). And why don’t they?

Because there are certain benefits to be derived from running a trade deficit. Let’s start with a very simple, “entity-level” example. I don’t mow my own lawn. I haven’t since 2013. It’s not that I’m not physically able, nor do I not have the time now that I don’t travel for work much. There are just other ways I’d rather spend my time.

So we pay a guy to mow our lawn. He provides that service to us, and we pay him for it. There is no quid pro quo. I don’t do anything for him that he pays me for. Therefore –

I run a chronic trade deficit with him.

He gets my money, I get my lawn mowed. That’s my benefit. I guess you could say that he “pays” me in time, or quality of life. If I wanted to balance that deficit, I could do it in one of two ways: I could demand that he pay me an equal amount to do something for him (like what – manage his investments?), or I could “onshore his production” by mowing my own lawn, which would save me some money (after I invested in a lawnmower, gas, oil, and a weed eater), but it would cost me my time. Plus my allergies would suffer in the Spring, and I’d get hot and dusty in the Summer.

I also run persistent trade deficits with the person who cuts my hair, the person who grooms our dogs, my doctor, my dentist, our veterinarian … And I run occasional, but large trade deficits with airlines and cruise lines, but I get significant benefits from the experiences I enjoy when we travel (I’d much rather pay for experiences than things).

Wow, how do I pay for all these trade deficits? Well, my clients run chronic trade deficits with me (technically my employer does – they “import” my services on behalf of my clients, who “consume” them).

Are you getting the picture? Unless an entity is entirely self-sufficient, it is going to run trade deficits. For an individual to avoid running trade deficits, one would have to basically live off the land. And for a country to do so, it would have to either be entirely isolationist, and not trade with any other country, producing everything its citizens consume (and nothing more, unless it ran surpluses, but let’s not get into that scenario); or, it would have to balance trade with every country by requiring each trading partner to import from it the exact amount of goods that it exports to that country.

Before we wrap this up, let’s look at an extreme example of why that’s impractical. We’ll use the African nation of Lesotho, and I’ll be revisiting this example in subsequent posts, because it helps define what the likely end game of the tariff strategy is.

Lesotho is a small landlocked country in the middle of South Africa. Its area is about the size of Maryland, and its population is less than that of Kansas. Its poverty level is roughly similar to that of Malawi, a country I’ve visited four times, and I can tell you that it’s poverty the likes of which most Americans will never see.

Our trade deficit with Lesotho was $234 billion last year, resulting from imports of $237 billion less exports of $3 billion.

There are two ways to balance that deficit. One is to require that they import an additional $234 billion from us, or about 80 times what they already buy from us. Lesotho’s GDP is about $2 billion. Do you think that’s going to happen?

The second way is for the U.S. to onshore the production of what we import from Lesotho. And what do we primarily import from them? Textiles, for one – like jeans. Sure, we could start making Levi’s in the U.S. Between paying union wages, complying with the alphabet soup of U.S. labor laws, and wading through the myriad of other regulatory hoops that the U.S. imposes on businesses, your Levi’s would cost upwards of $100 a pair.

What else do we import from Lesotho? Diamonds. Guess how many diamond mines are operating in the U.S.? Zero. Okay, technically, there’s one: Crater of Diamonds State Park in Arkansas, where you can dig for diamonds and keep what you find, which is most likely going to be nothing but dirt. But there are no active commercial diamond mines in the U.S. So we’d have to import the diamonds we buy from Lesotho from some other country, which would reduce our deficit with Lesotho, but increase our deficit with that nation.

But wait – the U.S. also happens to be the second-largest exporter of diamonds. How can that be? We import primarily rough diamonds, polish them, and export the finished product. And guess what? We make money doing so – about a 26% margin. Given Lesotho’s $56 million worth of diamond exports to the U.S. in 2023, that means we might have earned a margin of nearly $15 million selling the finished product. So we do gain a benefit from importing a product that it’s impossible for us to produce domestically due to a lack of mines.

Okay, this post is long enough for an introduction. In the next post, I’ll address the biggest benefit the U.S. gains from running trade deficits. In fact, it’s the very reason we run trade deficits, and the reason that we would never want to return to being an export-led manufacturing economy (yes, you read that right).