Trump Understands The Problem...

President Trump has long understood that America running perennial trade deficits isn't good. It's one of the policy ideas he has consistently held for decades, as you can see from this excerpt from Playboy's 1990 interview with Trump: 

Playboy: A group of Japanese visitors to New York was recently asked if there were anything in the U.S. they would like to buy. The answer: towels.

Trump: That’s fair trade: They’ll take the towels and we’ll buy their cars. It doesn’t sound like a good deal to me. They have totally outsmarted the American politician; they have no respect for us, because they’re getting a free ride.

Of course, it’s not just the Japanese or the Europeans—the Saudis, the Kuwaitis walk all over us.

...But There's A Better Solution

While Trump understands the problem, his solution of threatening arbitrarily high tariffs on different countries, and then backtracking with delays and exemptions, is causing chaos and weighing on markets, as Charles Gasparino noted on X on Thursday:

Three Generations Of Economists Wrote A Book About The Solution

Jesse Richman, Howard Richman, and Raymond Richman wrote about the solution: a scaled tariff. 

How The Scaled Tariff Solution Works 

The Scaled Tariff solution to trade deficits, as proposed by Howard, Jesse, and Raymond Richman, is a market-based mechanism designed to eliminate persistent trade imbalances by automatically adjusting tariffs based on a country’s trade balance.

Key Features of the Scaled Tariff:

1. Automatic Adjustment

   • The tariff rate increases when the U.S. trade deficit grows and decreases when the deficit shrinks.
   • This creates a self-correcting system that discourages chronic trade surpluses in countries like China while encouraging balanced trade.

2. Applies to All Countries Proportionally

   • Instead of targeting specific nations (e.g., China or Germany), the tariff applies uniformly to all U.S. imports based on the overall trade balance.
   • This prevents diplomatic disputes and retaliation focused on specific countries.

3. Neutral to Domestic Production

   • The tariff does not discriminate by industry or sector, meaning it doesn’t favor certain domestic producers over others.

4. Encourages Fair Trade Practices

   • Countries with artificially undervalued currencies, excessive subsidies, or other protectionist measures would face incentives to adjust their policies to maintain access to the U.S. market.

5. Revenue Generation & Economic Benefits

   • Tariff revenue could be used to reduce taxes or invest in domestic industries.
   • Encourages reshoring of production and higher domestic employment.

The Rationale Behind It:

The Richmans argue that free trade only works when both sides play fair. Many nations manipulate their economies through currency manipulation, subsidies, and industrial policy, leading to sustained U.S. trade deficits. The Scaled Tariff acts as a counterweight to these distortions, ensuring fairer competition without the need for trade wars or political negotiations.

If you know someone who works in the Trump administration, maybe you can pass this along to them. 

Limiting Your Risk In The Meantime 

While the tariff chaos continues, consider taking advantage of the next dead cat bounce to hedge. You can download the Portfolio Armor optimal hedging app by aiming your iPhone camera at the QR code below (or by tapping here, if you're reading this on your phone). Our app can help you find the least expensive hedges given your risk tolerance and time frame.

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