The Right Way to Do Tariffs

The U.S. is headed into another trade war...

President Trump just announced a new wave of 10% tariffs on China, plus 25% tariffs on all products from Canada and Mexico. He claims they'll protect American jobs and industries.

Markets are already reacting. The S&P 500 is down more than 3% this week.

Tariffs have long been considered bad economic policy. They drive up prices, distort supply chains, and often fail to accomplish their intended goals.

But as we'll cover, there's one scenario in which they're actually a great tool...

Tariffs can be the only way to stop an artificial monopoly...

Artificial monopolies happen when a country is using government subsidies and protectionist policies. China has spent decades perfecting this strategy. It blocks foreign companies from competing in its domestic markets. And it heavily subsidizes industries it wants to dominate.

Steel is one of the clearest examples. China has poured billions of yuan into its steel industry, allowing it to sell the metal below cost.

At first glance, this seems like a bad deal. It's giving away its product at a loss.

However, over time, this strategy forces private competitors in the U.S. and Europe out of business. These companies can't compete without subsidies of their own. They're forced to exit the industry.

The same thing is happening in technology. American platforms like Facebook and Instagram are banned in China, while Chinese platforms like TikTok are free to expand in the U.S.

Without competition at home, TikTok has become a global powerhouse... rapidly outpacing rivals thanks to its government-backed support.

This is how many modern monopolies form – not by beating competitors in a fair market, but by eliminating them through strategic trade policies and subsidies.

Tariffs can help – but only when used correctly...

Most tariffs do more harm than good. They raise costs, limit consumer choices, and often spark retaliatory measures from other countries.

But in cases like steel and technology, tariffs can serve a different purpose... stopping the formation of monopolies before they become impossible to break up.

Once a monopoly reaches a certain size, breaking it apart is nearly impossible.

Consider Standard Oil, which controlled 90% of the U.S. oil market by the 1880s. Even after regulators ordered its breakup, the company was able to reorganize. It delayed enforcement for nearly two decades before it was finally dismantled.

By then, it had already shaped the industry in ways that made true competition difficult to restore.

If entire industries – from steel to semiconductors to AI – become controlled by government-backed giants, free markets in those sectors could disappear entirely.

The industries facing government-backed monopolies will shape market performance for years to come...

Trump's new tariffs should help support U.S. steel producers in the short term, as artificially cheap Chinese steel becomes less accessible. That could provide a short-lived boost for domestic steelmakers.

That said, history suggests these benefits will fade quickly. If tariffs remain in place for too long, American steel buyers may simply turn to alternative sources or reduce demand altogether. That would leave the industry no stronger than before.

The chip industry is in a similar position. While the crackdown on Chinese semiconductor imports may create opportunities for U.S. chipmakers, it also introduces new risks. A more fragmented global supply chain could lead to higher production costs and manufacturing slowdowns.

Tariffs could increase volatility in these markets... and this could just be the beginning.

If Trump's goal is to dismantle foreign monopolies, it could take years. China in particular won't go out without a fight.  

Wishing you love, joy, and peace,

Joel
March 7, 2025