Tariffs Beyond Headlines: Part I: Trade, Trust, and the Machinery of Markets

Why I Wrote This

In recent months, I’ve had a number of conversations about tariffs — some with clients, some with friends, many prompted by the current trade war. These conversations have been thoughtful, sometimes spirited, and always grounded in a genuine desire to understand what’s actually at stake.

One exchange in particular stood out. As we discussed the second- and third-order effects of tariffs, I found myself thinking faster than I could speak. The view was there — formed and coherent — but it hadn’t yet been written down. That conversation, like many others, was thoughtful and generative. But it also highlighted how different these honest discussions are from the broader public discourse, dominated by political slogans, clickbait, and theatrics.

Rather than respond with quick opinions, I decided to write down my views on how trade works, why openness matters, and the broader consequences of protectionism. This isn’t a response to a specific policy — it’s an attempt to provide a clear, long-term perspective on a topic that deserves more than talking points.

This essay is part of a three-part series. Each installment explores a different layer of the issue: the first focuses on trade and capital, the second on institutions and innovation, and the third on political fragmentation and long-term risk. 

Why Trade Matters

In mainstream debates, trade is often reduced to a matter of cost and competitiveness. If tariffs help domestic producers by making imports more expensive, then the logic seems straightforward: protect home industries, save jobs, and close trade deficits. But this framing misses the broader and complex role that trade plays in coordinating economies.

Trade is not just about lower prices — it is a system for resource discovery and dynamic coordination. In a decentralized global economy, no single actor or institution possesses the knowledge required to determine where every unit of capital, labor, or input is most efficiently deployed. Markets solve this problem through the price mechanism. When goods, services, and capital move freely across borders, prices reflect underlying conditions of scarcity and preference. These signals guide producers, consumers, and investors.

Tariffs distort these signals. By artificially inflating the price of imports, they obscure the true cost of alternatives. Inefficient domestic production begins to look competitive. Capital is misallocated. Labor shifts to politically protected sectors rather than toward areas of genuine comparative advantage. In this way, tariffs don’t merely change where activity occurs — they degrade the informational function of prices that underpins efficient decision-making.

The consequences often go unseen. As Frédéric Bastiat observed, the true cost of economic policy lies not in what it creates, but in what it prevents. A tariff may visibly support a steel plant in Ohio, but invisibly burdens the thousands of firms downstream — automakers, manufacturers, builders — that rely on affordable steel. When the U.S. imposed steel tariffs in 2002, one analysis estimated they saved 3,500 steel jobs but cost 200,000 jobs in steel-consuming industries due to rising input costs. The price paid is rarely attributed to the policy that caused it.

Perhaps most importantly, tariffs are not neutral instruments. Once introduced, they alter incentives — not just in markets, but in politics. Industries that benefit from protection have strong incentives to preserve it. Entrepreneurs shift from creating value to lobbying for exemptions or expansions. What begins as a policy tool quickly becomes a political constituency.

And as one distortion invites another, the economy transitions from a decentralized discovery process to a managed system. Prices no longer reflect underlying realities — they reflect political judgments. The signals that once coordinated millions of decisions become unreliable. The feedback loops that allow markets to adapt and correct begin to break down.

Trade matters not because it is “efficient” in the textbook sense, but because it keeps the machinery of the economy responsive, decentralized, and informed. When that machinery is jammed — even in pursuit of noble aims — what follows is not just misallocation, but decline.

The Dollar, No Longer Default

The U.S. dollar’s role as the world’s reserve currency has long underpinned American economic power — but it isn’t guaranteed. This status exists not by decree, but by trust: trust in the legal system, in the depth and transparency of U.S. capital markets, and, perhaps most importantly, in America’s openness to global trade. When countries sell goods to the U.S., they receive dollars. Those dollars are then recycled into American assets — equities, real estate, and above all, treasury securities. This cycle is what elevates the dollar from a national currency to a global store of value.

Tariffs chip away at that foundation. As the U.S. reduces imports under protectionist policies, fewer dollars flow into the hands of foreign exporters. With fewer surplus dollars on hand, foreign governments, institutions, and investors have less need — and less ability — to reinvest in U.S. financial assets. This disrupts the supply side of global dollar liquidity. Over time, the dollar becomes less dominant — not through some orchestrated de-dollarization campaign, but because the incentive structure that sustained it begins to erode.

In 2000, over 70% of global foreign exchange reserves were held in U.S. dollars. That number has since dropped below 60%, and the trend has accelerated in recent years as nations diversify into euros, yuan, gold, and even digital assets (International Monetary Fund). While the dollar still dominates, its margin is shrinking. More countries are now settling oil trades in currencies other than the dollar — something that would have been nearly unthinkable just a decade ago.

The consequences of this are far-reaching. The United States has long enjoyed what economists call the “exorbitant privilege” of borrowing in its own currency — at lower rates than other nations, and at virtually unlimited scale. That privilege is upheld by global demand for dollar-denominated assets, especially treasuries. If that demand fades, borrowing costs rise. The U.S. loses its ability to finance deficits cheaply, and the fiscal squeeze tightens further.

But the fallout doesn’t stop there. A world in which the dollar is no longer the default reserve currency would mean higher transaction costs in global trade, less pricing power for U.S. firms, diminished sanctions leverage, and increased vulnerability to external shocks. Most dangerously, it would weaken the dollar’s role as a stabilizing force in global markets  just as American fiscal policy grows more fragile.

Currency trust is not enforced — it is earned. And in the long run, behavior, not branding, determines whether the dollar remains the world’s default.

The Trade Deficit Feedback Loop

Much of the political rhetoric around trade deficits treats them as economic failures — as if importing more than we export signals weakness or dependency. But this interpretation overlooks how trade and capital flows interact in an open, reserve-currency system like that of the United States.

When the U.S. runs a trade deficit, it sends more dollars abroad than it receives through exports. But those dollars rarely remain idle. Because the dollar serves as the world’s dominant reserve currency, surplus dollars held by foreign exporters are frequently recycled back into the U.S. in the form of capital investment. This can take the form of treasury purchases, equity holdings, real estate, or corporate debt. In effect, the trade deficit creates a capital account surplus — a self-reinforcing feedback loop in which dollars spent on foreign goods return as investment in U.S. financial assets.

This loop plays a stabilizing role in the American economic system. Foreign demand for U.S. Treasuries helps keep long-term interest rates lower than they otherwise would be, even amid growing public debt. Foreign participation in U.S. equity markets boosts liquidity and supports valuations — particularly for large, globally integrated firms. In this arrangement, the U.S. economy can afford to consume more than it produces in tradable goods precisely because it remains the most attractive destination for global capital.

Protectionist policies threaten this balance. When tariffs reduce imports, fewer dollars flow abroad — limiting the amount of surplus currency available for reinvestment into the U.S. financial system. Foreign capital inflows slow. The demand for teasuries softens, exerting upward pressure on interest rates. Equity markets lose one of their key structural supports. The very policy intended to correct trade imbalances ends up undermining the mechanisms that have historically kept those imbalances sustainable.

More fundamentally, capital does not flow where it is told — it flows where it is trusted. Trade barriers introduce friction and signal that economic openness is no longer a given. Investors — both foreign and domestic — take note. And when trust in that openness erodes, the feedback loop begins to unravel.

From Monetary Privilege to Fiscal Dominance

For decades, the U.S. has operated under a critical assumption: that it can borrow at scale, indefinitely, and at low cost. This assumption has not held because of fiscal discipline, but because of sustained global demand for dollar-denominated assets . That demand, in turn, is a product of America’s central role in global trade. As long as foreign economies export goods to the U.S., they accumulate dollars — and as long as those dollars are recycled into U.S. debt, the system remains stable.

The U.S. national debt has already surpassed $36 trillion. The only reason it remains even marginally sustainable is that the cost of borrowing has remained historically low. But if foreign investors begin to reduce their treasury holdings — or simply fail to absorb new issuance — interest rates will rise. 

Higher rates bring the federal government to a fork in the road: raise taxes, cut spending, or turn to the Federal Reserve. The political incentives almost always favor the third. In doing so, the system drifts toward fiscal dominance — a regime in which monetary policy becomes subordinate to fiscal necessity. The Fed, rather than fulfilling its dual mandate of price stability and maximum employment, becomes the financing arm of the Treasury.

In a market-driven system, interest rates emerge from time preferences — the tradeoff between present consumption and future investment. But in a fiscally dominated regime, rates are set not by markets, but by politics. Borrowing becomes money printing. Taxation becomes inflation. The bond market, once a check on fiscal excess, becomes a captive.

Tariffs contribute to this dynamic in an indirect but powerful way. By narrowing foreign demand for U.S. debt, they increase reliance on domestic buyers — public or private — at precisely the moment when government borrowing needs are accelerating. This amplifies the role of the Fed and distorts the price of money itself.

Worse still, this transition can occur gradually, almost imperceptibly. First the Fed intervenes to “stabilize markets.” Then it holds rates low to preserve financial stability. Eventually, it finds itself unable to normalize policy without triggering a recession — or a sovereign debt crisis. This isn’t hypothetical. It’s the documented arc of monetary repression across economic history.

The endgame isn’t just inflation or dollar devaluation. It’s the erosion of the market’s capacity to discipline excess. A system that once signaled risk now suppresses it. And when no one is willing to speak hard economic truths, everyone is left pretending someone else is in control.

Teaser for Part II

Tariffs are often debated in narrow terms—who gains, who loses, which sectors rise or fall. But as this first installment has shown, the true cost of protectionism is structural. Tariffs do not merely alter trade flows; they warp the invisible architecture that supports a healthy economy. They disrupt capital allocation, undermine currency trust, and accelerate our drift toward fiscal unsustainability. In the process, they compromise the mechanisms—openness, adaptability, trust—that once made America an economic powerhouse.

But the story doesn't end there. In Part II, we turn from economics to institutions—exploring how protectionism erodes entrepreneurial dynamism, hollows out innovation, and diminishes American cultural and diplomatic influence. We'll examine how a policy meant to strengthen the nation can, paradoxically, leave it more fragile—internally and abroad.