America’s Tariffs: Clear Losers, but Decoupling From China

President Trump has razed an economic order that has prevailed for decades. It became an “unlevel” playing field, tilted against the United States — anyone who can read a chart can see that. There are non-economic resentments as well.

For decades, out of largesse, conflict avoidance, and hope, the U.S. has tolerated many countries that have been picking its pocket in different ways. Europe has benefited from American nuclear protection since the end of World War II, allowing it to be fundamentally pacifist and spend money on extensive social safety networks. To put it another way, and to use the common metaphor, the U.S. spent money on guns while the Europeans had the luxury to spend it on butter — and perhaps some caviar.

Similarly, Canada has avoided responsibility for its defense, spending only 1.37 percent of GDP on defense for fiscal 2025, and is unable to reach 2.0 percent until 2032, according to a Government of Canada announcement updated in January. (READ MORE: What’s Wrong with Canada?).

Even though the U.S. and Mexico have been economically integrated long before NAFTA, Mexico has done little to nothing to stem the tide of illegal migrants and eliminate the drug cartels that threaten this longstanding American partnership. Further, China’s admission to the World Trade Organization in 2001 was a naive, misguided action that assumed that through prosperity, China would respect the rule of law and “be like us.”

The can was kicked down the road by many administrations, knowing that the consequences of trying to right the trade balance would be draconian and unpopular.

President Trump’s message to the world is like hitting someone in the solar plexus with a lead pipe. At a minimum, it has gotten the world’s attention: “Something is rotten in the state of Denmark,” to quote Marcellus in Shakespeare’s Hamlet, describing a situation that is wrong.

The trouble is that in the short run, among the major losers are American interests. First is the consumer, a sector contributing almost 68 percent of GDP. Successful mass marketing retailers such as Walmart and Target will need to decide how much of the tariff increase will be passed on to the American consumer, to protect their margins and meet shareholder objectives.

A recently released study of the Congressional Research Service indicates that over half of U.S. households have retirement accounts. These are not all so-called coastal elites festooned with Hermès silks and soft Ferragamos. Since the tariffs were announced, the Dow Jones, S&P, and NASDAQ have fallen about 9-11 percent over two trading sessions, and the slide continued on Monday. Further, concern over tariffs had taken a toll before this.

A frightened consumer will limit expenditures, especially discretionary ones. Also, because of tariffs, the consumer will have less freedom of choice, and will not be able to buy Chinese electronics or German or Japanese automobiles, even if they are deemed to have superior functionality or quality than those originating in the U.S. (READ MORE: Are We Now in a Recession but Don’t Know It?)

The second major loser is the U.S. automotive industry. In February, Ford CEO Jim Farley told members of Congress that tariffs against Mexico and Canada will “blow a hole” in U.S. automobile manufacturers. Both Ford and GM have performed well over the past five years, with stock prices rising over 110 percent during this time. The U.S. auto industry represents over 10 million jobs and constitutes almost 5 percent of GDP.

Other major losers are Wall Street, where the stock market carnage, as noted, has been ferocious — and Silicon Valley. Technology companies are also among the casualties, including the so-called Magnificent Seven, who lost $1.8 trillion in aggregate market capital on Thursday and Friday alone. Further, the American farmer now fears losing the China export market due to retaliation.

It is not possible to predict the longer-term consequences of the tariff war. However, some good should come from a partial decoupling of the United States and China. Since China joined the WTO, there has been a transfer of $18 trillion of capital from the U.S. to that country, advised Peter Navarro, senior counselor for trade and manufacturing, on CNN on Saturday.

This transfer of wealth has emboldened China, funded its massive military buildup, foreign aid, and vaunted Belt and Road Initiative, and made the country more belligerent toward Taiwan and other Asian countries, thinking of itself as a peer of the United States, determined to dominate the world order for trade and investment. Some U.S. companies in China will now need to redirect supply chains to other lower-tariff Asian countries or to the U.S., if they have short-term plant capacity. (RELATED: China’s Threat to Taiwan: Intentions and Capabilities)

However, supply line offshoring and globalization — the integration of purchasing, selling, and distribution — took decades to transpire. It is hard to fathom a quick renaissance of America as a manufacturer, becoming a workbench for the world. Navarro is right that, eventually, one must assess the full economic landscape, including the bond market and mortgage rates, although right now the skeptics in various sectors seem to outnumber the believers.

While on Sunday, officials cited positive signals from over 50 countries that wish to negotiate — India, the U.K., and Vietnam being among them — narrowing a $1.2 trillion trade deficit will take time.

Recent economic history shows us that government intrusion into private markets can have drastic consequences. The demand for subprime (low-quality) mortgages by Fannie Mae and Freddie Mac, both known as Government-Sponsored Enterprises (GSEs), was an underlying cause of the 2008 meltdown that destroyed part of Wall Street: It led to a misallocation of capital.

Similarly, a return to manufacturing industries that have become uncompetitive is no substitute for investment in military preparedness and deterrence abroad, and in Artificial Intelligence, the electromagnetic spectrum, and space warfare.

Frank Schell is a business strategy consultant and former senior vice president of the First National Bank of Chicago. He was a lecturer at the Harris School of Public Policy, University of Chicago and is a contributor of opinion pieces to various journals.

READ MORE from Frank Schell:

Are We Now in a Recession but Don’t Know It?

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Blessed Is Donald Trump, for He Shall Inherit a Mess

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