Donald Trump’s recent actions with respect to the use of tariffs as a weapon to re-industrialise America demonstrates not only an utter failure to understand the economics of that move but also the geo-economic realities of the world in which those actions are being taken.

Tariffs have been around for hundreds of years and have been principally used to protect local industries from cheaper or better quality imports. The US grew to be the manufacturing powerhouse of the world by using tariffs for well over a century to give US manufacturers an advantage over their international competitors. Yes, it is true that the use of tariffs in this way represented a complete contradiction of the claims by US elites for the last 200 years that the US was and is a country that is founded on free enterprise and free markets, but whoever said the US had to pursue policies consistent with their ideology.

Throughout that many decades of rampant protectionism, US Governments encouraged investment in infrastructure that would support the industries being so protected, and where the private sector would not build that infrastructure, the government did. This was about reality, not theory. It was about creating comparative advantage where it had not previously existed. That approach was copied from the British Empire and refined to a far greater extent. Tariffs were used to enable those industries to grow at a far greater rate than they would have were the tariffs not in place. It was largely about protecting existing industries, not about creating new industries from scratch.

The problem for the US is that many of the industries that made it powerful, particularly after World War II, now simply do not exist any more in the US. US corporation managements and boards have outsourced all these industries, mainly to China, in pursuit of short-term profit, but at the expense of medium- to long-term economic health. That essentially means that the tariffs being implemented are there not to protect existing US manufacturing capacity, but to create a space where new manufacturing can commence. The problem is that in addition to the tariffs, huge subsidies will be required to rebuild the manufacturing capacity and huge investment will need to be made in training and development of all the skills necessary that have been lost over the last 30 years And that is not even to mention the vast increase in expenditure necessary to rebuild an efficient national infrastructure to enable those industries to function efficiently and compete. All of this will need to be funded by a country with a national debt so stratospherically high now that it is severely restricting any capacity to funds the investments necessary to achieve it.

If those essential accompaniments to building new industries are not present, then those industries will remain uncompetitive with more efficient and well-established companies in other countries and will thus vastly increase prices in the US and the cost of living, which incidentally is already happening. That scenario clearly indicates the fact that Trump and his advisers are unable to understand the economic realities surrounding tariffs.

But even more consequential is their equal misunderstanding of the geo-economic realities of the world in which these tariffs are being introduced. The US is no longer the unchallenged hegemon and source of the best manufactured products. Even more to the point is that the US can no longer bully and intimidate those countries from which it has drawn cheap and plentiful raw materials to feed its industry. A classic example of that is the raw material that is vital to the one manufacturing industry flourishing in the US, the armaments industry. China’s dominance in the rare earths market comes from a realisation decades ago that these would be the raw materials of advanced manufacturing and their decisions to make strategic investments in mining, refining, and technological development. China “accounts for about 80% of the world’s rare earth production and has a near-monopoly on processing capacity".

When Trump announced his increased tariffs on China, its response was to cut off US access to these rare earth metals. A good example of that is the metal tungsten. Ninety percent of the world’s existing supply of tungsten is controlled by three countries: China, Russia and North Korea. China, with by far the biggest supply, has now cut off the US from all tungsten supply. No prizes for guessing the attitude of Russia and North Korea to upping their supply of tungsten to the US. That metal is a vital component in the US arms industry. Without it, the US capacity to manufacture arms will be dramatically affected until alternative sources can be developed. At a time when demand for tungsten is vastly exceeding supply, this could create massive medium-term supply chain problems for the US. The same considerations apply to the supply of gallium, germanium and antimony; China has a massive control over their global supply.

Similarly, in agriculture China, which has been the largest customer for US soybeans, has now switched massively purchasing of soybeans to the cheaper Brazilian market, leaving US producers to find alternative purchasers for tens of thousands of tons. The same dynamics are at play in the vastly reduced purchases of US wheat by China.

While none of these Chinese countermeasures present insurmountable problems for the US, they will vastly increase the costs in the US and may take months, years or decades to satisfactorily address. The costs attached to that are almost certain to vastly outweigh the benefits to US industry of these ill thought-out tariffs.

The views expressed are solely those of the author and may or may not reflect those of Pearls and Irritations.