The United States is embarking on a risky tariff plan that could either succeed spectacularly or backfire dramatically. These tariffs aim to raise revenue and rebalance trade, but they could also trigger significant retaliation.
The 2018 tariffs faced mild retaliation because countries were unprepared. This time, the response will be different. Canada, for example, plans to retaliate with tariffs on over $100 billion worth of US goods, a significant escalation compared to 2018.
To prevent widespread retaliation, the US should focus on countries that can absorb the cost of tariffs most effectively: China. Other countries, particularly in South America, might absorb the costs through currency devaluation, but this is less controlled and predictable.
China has strategically devalued its currency by 19% over the past decade. During its recent recession, China further lowered prices by 10% over the last seven quarters. Combined with export subsidies, China has effectively reduced the value of its goods by about 32%. This allowed them to absorb the first round of tariffs (averaging 19.3%) while still making their goods cheaper.
Round 2 Tariffs in 2025:
China currently exports around $600 billion worth of goods to the US, including $160 billion in components used in products made elsewhere. The US can impose a 60% or 100% tariff on Chinese goods and encourage China to counter it through currency devaluation. This would allow China to maintain its exports while generating significant tariff revenue for the US.
For example, a $100 pair of shoes made in China with a 60% tariff would cost $160. China could devalue its currency from the current 7.3 yuan to 1 dollar, to 10 yuan to 1 dollar, a 37% devaluation. Combined with profit reductions, lower importer charges, and increased subsidies, this could further reduce the cost of those shoes by 13%. This tactic would bring the price of the shoes from $100 to $50. A 100% tariff would then bring the price back to $100, generating $50 in tariff revenue. If executed on all Chinese imports, this strategy could generate $180 billion in annual tariff revenue for the US on $450 billion worth of direct imports from China.
Addressing Europe, Canada, Vietnam and Mexico:
These countries have less flexibility to adjust their currency, making a trade war undesirable. Instead, the US should impose a 20% tariff on all products containing Chinese components. This would incentivize companies to relocate production or source components elsewhere, gradually reducing reliance on China.
This tariff could generate significant revenue:
- Vehicles: A 20% tariff on vehicles with Chinese components would generate $40 billion annually.
- Other products: A 20% tariff on the estimated $400 billion worth of goods imported from countries like Vietnam, Mexico, and Germany that contain Chinese components could generate $80 billion annually.
Direct Tariffs on other Countries:
The use of direct tariffs on other countries to prevent retaliation should be entirely based on the tariffs those countries impose. India, having some of the highest tariffs, would see its exports to the USA significantly reduced if they faced a 30% tariff to enter the U.S. market. India would be pressured to drop its tariffs, and this would allow an influx of U.S. food products into India.
Indonesia has a 10% VAT on imports and a 7.5% domestic VAT, which is similar to a 17.5% duty. To address this, the USA could mirror that rate and offer a bilateral trade agreement where the 17.5% VAT is reduced only for U.S. goods. The USA could then potentially sell a large amount of agricultural products to Indonesia’s population of nearly 300 million people.
About 30 countries could see bilateral agreements and tariffs may be the way to get there.
Long-Term Impact:
These tariffs could generate around $300 billion in annual revenue for the first 3-4 years. While China might absorb the tariffs on its direct exports, other countries would need to adapt. This could lead to:
- Reshoring of manufacturing: The Car companies will certainly relocate production to the US to avoid tariffs, boosting domestic manufacturing. The major non-U.S. auto companies all have factories in the United States where they can build cars. Nissan and Honda have been struggling with sales, and they could bring production of more of their foreign-made models to their U.S. factories to maximize capacity.
- Supply chain diversification: Companies will seek alternative sources for components, reducing reliance on China. This is ideal for a US geopolitical strategy.
These tariffs offer a potential solution to generate revenue, rebalance trade, and reduce dependence on China, and bring jobs back to the United States. However, careful implementation and strategic partnerships are crucial to avoid a destructive trade war. Just to note, these are only on China as China is the only country obsessed with a trade surplus, so they will devalue their currency to get the dollars!
