New US Tariffs: A Closer Look

Last week, the US President honoured his election promise, indeed his long-held commitment, to increase tariffs on imported goods and services to the US. The formula they came up to differentiate between countries was bizarre but I don’t intend commenting on that here, except to say, the imposition of tariffs on the [Heard Island and McDonald Islands](https://en.wikipedia.org/wiki/Heard_Island_and_McDonald_Islands) – which are an ‘Australian external territory’ that is ‘a volcanic group of mostly barren Antarctic islands, about two-thirds of the way from Madagascar to Antarctica’ (where penguins live) ranked up there with their Signal chaos. These guys have access to the ‘red button’ after all. That’s the scary thing. Anyway, I was sent a document that seemingly is the theoretical rationalisation for the tariff decision (thanks Mahaish, appreciated) and so I thought I would give it some time.

The Heard and McDonald Islands fiasco brings home the fact that the US Administration is making rapid decisions, using flimsy data and poor analytical reasoning.

Given the seriousness of these decisions in relation to global stability and the like, we are going through a very dangerous historical period.

In the case of the Islands above – they are uninhabited and very remote.

There is some research equipment there and not much else.

The UK Guardian article (April 4, 2025) – [Not that Norfolk! Mislabelled shipments led to Trump tariffs on uninhabited islands and remote outposts with no US trade](https://www.theguardian.com/australia-news/2025/apr/04/revealed-how-trump-tariffs-slugged-norfolk-island-and-uninhabited-heard-and-mcdonald-islands) – tells us that according to the current US Administration, the US imported “Aquarium systems, Timberland boots, and recycling plant parts” from these islands.

The US relied on the World Bank data apparently which claims that “the US imported US$1.4m (A$2.23m) of products from Heard Island and McDonald Islands in 2022, nearly all of which was “machinery and electrical” imports.”

Hilarious, which also demonstrates why the World Bank should be dismantled and replaced with a more progressive and competent mission.

All economists seem to agree that the decision by the US President to impose these varied tariffs will undermine American prosperity.

That is what is taught in undergraduate and graduate programs all around the world.

Just this morning (April 7, 2025), the Melbourne Age newspaper carried analysis from its Senior economics editor – [Trump’s trade war is bad, but how bad is up to the rest of us](https://www.theage.com.au/business/the-economy/trump-s-trade-war-is-bad-but-how-bad-is-up-to-the-rest-of-us-20250406-p5lphs.html) – that said among other things that:

So, while Trump’s tariffs – import duties – will hurt the countries it imports from to an extent, it’s the American businesses and consumers now having to pay more for their foreign purchases that will be hit hardest.

What he’s done will increase US prices and discourage growth in his economy – an unusual combination – increasing the risk of a US recession.

His article continued to analyze the direct and indirect impacts on Australia, which I will leave for another day.

I did a radio interview the other day and was asked about this conventional view.

Rather the conventional view was asserted by the interviewer with the question: “we all agree with that”.

To which I responded: “Not quite, it all depends on what happens to the exchange rate”.

While that view is not conventional, it reflects, to some extent what we have observed in the past when looking at the aftermath of tariff decisions.

The problem is that most of the tariff dynamics historically have been associated with the fixed exchange rate period and like a lot of mainstream macroeconomic monetary theory, which was based on that period, the conventional wisdom about tariffs might be askew.

Indeed, there is evidence that during Trump’s first term, the imposition of tariffs did create exclusive burdens for US domestic residents.

More on that in a while.

FAQ

1. What is the rationale behind the US President’s decision to impose tariffs?

The US President aims to reform the global trading system and put American industry on fairer ground vis-à-vis the rest of the world. The tariffs aim to address the persistent dollar overvaluation that prevents the balancing of international trade.

2. How do tariffs impact international trade balances?

Tariffs can impact international trade balances by affecting the exchange rates between nations. The imposition of tariffs can lead to changes in relative demand for currencies, influencing trade flows and balance of payments between countries.

3. What are the potential consequences of the US tariffs on global stability?

The US tariffs could lead to increased prices for American businesses and consumers, potentially discouraging economic growth and posing a risk of a US recession. The impact on foreign exporters subject to the tariffs could also result in reduced real income and competitiveness for those nations.

Conclusion

There is a lot more to write about all this. But the message is that I doubt the hopes that the CEA chair is transmitting will work out in the way he thinks. In part, it will depend on how much activity is shifted onto US soil from the large foreign exporting corporations and I will write about that another day. That is enough for today!

(c) Copyright 2025 William Mitchell. All Rights Reserved.