Tariffs, The American Mittelstand and The Mighty Wurlitzer
Contrary to the press coverage and general chatter in the markets, I think the US is pulling off an extraordinary coup with the tariff announcements. To be clear, I am a free trader. I wrote my Ph.D. on trade policy and advised the US and UK Governments on trade issues. So, this is not an off-the-cuff view. The US has now launched a global free trade deal that is more ambitious and which will include more nations than anyone in the trade policy world had ever imagined possible. As someone whose family spent the last forty years negotiating the reduction of tariffs and non-tariff barriers to trade, it is frankly astonishing to see how fast countries are willing to drop their tariffs to zero. They are also willing to work with the US on policy and on reducing Non-Tariff Barriers. Vietnam was the first to fold. They dropped their tariffs to zero. Why? Because they have no choice. The rest of the world needs to sell to America, but America does not need to sell to the rest of the world. Simple. As the Pax Americana Global Free Trade Zone takes shape, hold-out nations will lose business to the nations that have joined. Izabella Kaminska sharply observes that the tariff announcements for Liberation Day were suspended for 90 days. This means that the next big tariff announcement will be on the Fourth of July. This has all been remarkably carefully thought through. I’m betting Trump manages to drive stock prices through the roof just in time for the midterms.
The message may have been delivered with a baseball bat, but fundamentally, the US has offered the world a compelling invitation: start making your products inside the United States. This is a gift to any nation that wants to build global brand names and move up the value-added curve, which they all do. You can’t raise national incomes any other way. For those who argue this cannot be done, one needs to remember what happened with Japan’s Toyota and China’s Haier. Both made this leap into US manufacturing years ago with great success. It’s been done before. Now, it can happen at scale. We all know that Toyota’s US plants are their most profitable and produce the highest US content autos in the US. Haeir’s story is less well-known.
Haier is a Chinese firm that initially specialized in making refrigerators. It was led at the time by the now legendary Zhang Ruimin. He bolted to fame when, in 1985, he “deliberately smashed” seventy-six flawed refrigerators in order to raise employee awareness of quality control. This was the “watermark event that pushed Haier to become a household name.” He then boldly decided that Haier should start making fridges inside the US, in Camden, South Carolina, in 1999. They then opened manufacturing facilities in Indiana and eventually bought out GE’s small appliance arm for $5.4b in 2016. This all began with wine fridges. Haeir realized they could not compete with the mega American fridge brand names, but they saw underserved markets. More and more Americans were buying wine, but nobody was supplying wine fridges. The Carolinas are famous for their furniture crafting skills, so Haeir focused on making very silent small fridges clad in very refined, beautiful wood exteriors. The product flew off the shelves! They also realized that college students, then a rapidly growing demographic, wanted small but silent fridges in their dorms. They flew off the shelves, too. In an interview I read years ago with him (that I can’t find now), Ruimin spoke about how much his firm learned from being inside the US market. They would never have learned about quality control had they not tried serving the very discerning American customer. He was a big believer in servicing local markets. This is important today because advances in technology mean that manufacturing can now be done anywhere with virtually unlimited labor (automation). China no longer has a lock on being the least expensive place to make things. Now, automation reduces the labor content, and it becomes possible to make things for local needs while still remaining profitable. The old business model based on scaling identical products across the globe no longer applies.
So, Trump is saying, sell more of your stuff to your own people (increase consumption at home) or come here to make the things you intend to sell to us Americans. Some will say this strategy is not going to create manufacturing jobs for humans. It will create jobs for robots. This is true. America is offering access to cheap, abundant, but mechanical labor. But, for every manufactured item, there are new jobs for Americans in the things Americans excel at - branding, strategy, sales, social media engagement, servicing, customer relations, finance, and virtually every other aspect of product marketplace management. These are, generally speaking, higher-paying, higher-value-added jobs. Personally, I am not in favor of having humans doing heavy lifting or numbing and dangerous repetitive tasks. This strategy frees humans from their bodily skill sets to engage in their creative skill sets, which is progress.
The US had been heading towards becoming the next Argentina. The tariff shock therapy firmly demonstrates that the bond market vigilantes are not just back. They are now in charge of policy. As The Secretary of the Treasury said, “I could have kept issuing bonds,” but it would have ended in a catastrophe. The snafu happened because of the religious zealots on trade. Peter Navarro and, to a lesser extent, Howard Lutnik hijacked the narrative from the calmer and more measured Secretary of The Treasury. This kind of interdepartmental mixed messaging is typical of new administrations. What matters is that Bessent has reasserted control. Bessent understands that the markets are full of people whose whole professional life has been dominated by Alan Greenspan’s “Forward Guidance.” For decades, policymakers took risks out of the market and subdued volatility in order to remain popular and powerful. They spoon-fed the markets. They kept Greenspan’s put in place.
The End of Spoon-Feeding and Forward Guidance
Bessent may take a gentler approach than Lutnick and Navarros, but make no mistake; he is also signaling that this is the end of the molly-coddling. If you want to get paid in markets, there must be risk, and you must take risk. He is restoring risk into the markets. There will be fewer warnings. No more bailouts. No more spoon-feeding. The investor’s job is to pay attention and get paid for managing the volatility. President Trump and many Democrats have insisted that the unlevel playing field in tariffs has been a problem for decades. This is arguably the most consistently broadcast strategy ever pursued by any President (see him explaining the strategy in the late 1980s to Larry King here). The question is why anybody was surprised.
Returns will go up for those who have the skill to ride both the Bull and the Bear. For the young who have no memory of the pre-Greenspan era, buckle up, take a deep breath, and enjoy the ride. This is when you learn. You don’t learn anything when markets smoothly and predictably rise. By the way, this kind of volatility used to be normal when I started working on a trading floor in 1991. You’ll get the hang of it.
It is easy to think about all this as a fight between the US and China. That’s the way it’s being framed. But, the tariff strategy also reflects a domestic fight between two distinct camps: The Corporatists and the Techno/Oligarchs. The latter is now in charge and signaling a serious change in the way capital will be allocated going forward. They want to disintermediate Wall Street and the handful of private equity firms that have decided who does and does not get capital. It was a small club. They only invested in potential unicorns. This left most of the entrepreneurs out in the cold. With these announcements, the TechnoOligarchs aim to shift more money into the hands of small and medium-sized businesses that may not be unicorns but which are reliable workhorses. Banks and community lending institutions will be encouraged to lend. IPOs of unicorns led by investment banks are no longer the only game in town. The legalization of tokenization/crypto/Bitcoin/ and the creation of a US Sovereign Wealth Fund will open up new pathways for capital to bypass intermediaries and reach risk-takers more directly.
American Mittlestand
The goal here, as Izabella Kaminska has been pointing out for a while, is to create an American Mittlestand. Americans don’t know this term, but the Mittlestand is the backbone of the German economy. Most important and successful firms in Germany are not publicly listed. The vast majority are family-owned and privately financed. It’s ironic, but Trump and Co, in one sense, want America to be more like Germany in this one respect. In addition to creating a global free trade zone for American-made goods, the team is committed to creating new ways of financing the Mittlestand. They are on track to ease up taxes on businesses and entrepreneurs, too. The US is about to become Ireland, meaning a country with a 15% business tax rate. Watch Trump offer Ireland statehood next! Watch for regulations to fall away in the US.
TechnoOligarchs vs Corporatists
The real fight here isn’t between the US and China. It’s between the TechnoOligarchs and the Corporatists. Trump aims to encourage the workers of America to leave big corporations and stop relying on the stock market to secure their future. The message from The White House is, “Stop relying on your corporate 401k to do all the work for