Tariffs: America's Surgery Moment

release edition [014]

read time [10 minutes]

Welcome to The Multifamily Download, a weekly newsletter where I provide institutional insights to help you build an exceptional Multifamily career.

Today at a Glance:

Tariffs: America's Surgery
Weekly Listen: Naval Ravikant

Here's Your Information Advantage:

Tariffs

Imagine someone breaks their leg. What happens next?

Well, they go to the hospital, have surgery, and then begin the healing process.

Healing from a gruesome injury could occur naturally, and though a full healing would be unlikely, if a full healing were to occur, it would be slow, painful, and costly.

On the contrary, receiving surgery to help a gruesome injury heal increases the chances of full healing exponentially, and although the surgery is painful temporarily, the recovery is typically steady, predictable, and ultimately desirable.

Does this sound familiar yet?

Enter: The United States economic landscape.

Now, imagine that this patient breaks a bone every year, they never consider surgery, and they continues to break bones each year for multiple decades.

The 'patient' is the United States and the 'broken bones' are excessive government spending.

As you can see in the graph below, 2024 was the third largest U.S. federal deficit in the history of America, and the largest aside from the two COVID years.

The result: Government debt interest payments topped $1T in 2024, making interest payments one of the largest line items in the government budget.

For a zoomed out context, below are two graphs that show federal debt held by the public from 1975 through 2024 in both a dollar amount (top graph, in Trillions) and as a percentage of GDP (bottom graph, 49.7% average over the time period).

For reference, debt held by the public includes debt held by individuals, corporations, state and local governments, Federal Reserve Banks, foreign governments, and other entities outside the United States Government.

I share the four graphs above simply to set the stage for the remainder of today's newsletter. Context is everything, and hopefully you're realizing that the context of the fiscal situation for America is anywhere from dire to depressing. Any company run with the fiscal responsibility (or lack thereof) of America would be out of business in five minutes.

Secondly, I realize that there's a lot of emotional and political rhetoric being used regarding tariffs, so I thought it might be helpful to take a relatively unbiased look at both sides of the argument, share a few ideas or questions worth considering, and let you draw your own conclusion(s).

Thirdly, the 'booming U.S. economy' is actually not booming; like I wrote about earlier this year, we have a K-Economy. For example, Treasury Secretary Scott Bessent recently shared publicly that the top 10% of Americans own 88% of the stock market ("equities"). The next 40% owns 12%. The bottom 50% has debt. In 2024, more Americans traveled to Europe AND more Americans used food banks than ever before.

Before we dig in, and for the avoidance of doubt, I am currently neither pro-tariff or anti-tariff. Instead, I'm in the 'wait and see' camp. Because in all reality, it's far too early to draw definite conclusions about the recent tariff announcements.

To begin, what is a tariff?

A tariff is essentially a tax imposed by a government on imported goods, designed to increase their price and potentially discourage consumption, protect domestic industries, and act as a source of revenue.

Tariffs are inherently designed as protection mechanisms, to protect a country from becoming a net-importer (trade deficit) that is overly reliant upon other countries to fulfill the needs and obligations of it's own citizenry.

The U.S. is in a unique position due to the U.S. dollar being the global reserve currency. Without currency stability, the U.S. would likely have been forced to operate far more independently (and aggressively) than it has over the past several decades in terms of global trade, production, and consumption.

But, despite the U.S. containing just 4.2% of the global population, its populous accounts for 25-30% of global consumption. What happens if Americans start spending more of their dollars on domestic goods and services?

I'm glad you asked.

Let's look at China as an example.

In 2024, the U.S. exported $143.5B in goods to China, while China exported $438.9B in goods to the U.S., or approximately a 3:1 ratio.

Additionally, the percentage of U.S. exports to China relative to the total U.S. global exports was just 6.95%. Conversely, the percentage of Chinese exports to the U.S. relative to the total Chinese global exports was 12.3%.

So, not only does China export 3x more goods to the U.S. than it imports from the U.S., that 3x comprises 12.3% of their total global exports.

This means that China would have to tariff American imports at 3x the rate of U.S. tariffs on Chinese goods to simply match the revenue generated by those tariffs.

China is clearly far more reliant on the U.S. than the U.S. is on China with respect to trade.

Setting China aside for a moment, why does the U.S. need tariffs, and why should us Real Estate folks care?

As I've written about previously, I'm of the belief that tariffs are taxes, and taxes are incentives.

The graphs above show very plainly that the patient (the United States) is due for surgery, and tariffs are one form of surgery.

Yes, short term pain is more likely than not, but the cost of inaction would almost certainly be higher than the cost of tariffs over America's longer term.

Without a drastic change, or surgery, the train that is the United States of America is going to eventually crash.

The pro-tariff argument looks something like this:

1. National Security.

Domestic production of essential goods and services is the only mechanism by which a country can be self-sufficient, and therefore secure. Tariffs, because they are taxes, incentivize greater domestic production and inherently add to the national security of the country imposing the tariffs.

2. Wage Growth.

Reshoring jobs to the tariff country reduces supply chain costs (i.e. middle men), and offers a redistribution of those dollars back into the domestic worker's pockets. While it's not inherently this simple, the principle remains -- wages grow when goods and services are produced domestically and labor demand is increased.

3. GDP Growth.

When companies produce goods and services domestically, the country's GDP receives a multi-benefit. Companies pay more corporate taxes, workers pay more income taxes, and more dollars flow through the domestic economy, which creates an amplifier effect on GDP growth. More spending = more taxes paid = budget surplus = lower taxes = more spending.

Now, the anti-tariff argument looks something like this:

1. Higher Prices.

Tariffs are a tax, and those taxes are paid by the consumer. If the tariffing country is not prepared to meet the demand of its citizenry then higher prices will have to be paid on imported goods, all else equal.

2. Margin Erosion.

If businesses must pay more for raw goods or input costs then their margins will erode, and it will be tougher to pay workers higher wages in the short- to mid-term. Wage growth could stagnate, despite higher prices on goods and services that were historically imported.

3. Less Competition.

Reduced competition means a less efficient market, and opens the door to lower quality products and consolidation leading to oligopolies or even monopolies.

This section is already longer than I intended, but you get the point. Tariffs are not a guaranteed "if this, then that" mechanism, so the impacts still remain to be seen.

However, here are a few questions worth considering:

If tariffs don't work, why do so many countries impose them?

If tariffs don't work, why are countries afraid of the U.S. imposing them?

If tariffs do work, who benefits? Who loses? And why?

Many will point to the Smoot-Hawley Tariff Act of 1930 as a precursor to the Great Depression, however the S-H Tariff Act was rigid, extreme, poorly timed, and originally narrowly focused on agriculture.

Conversely, the argument could be made that today's tariffs are flexible, largely reciprocal, well-timed, and broad-based, which leaves room for negotiation with countries that choose to explore "free trade" options.

As in Real Estate, the cost of inaction seems be the highest priced item on the shelf for the United States. Allowing the 'patient' to die on the operating table is not a viable option, and that's why President Trump earned a second term last November, because he has promised to bring radical change to the way the U.S. government operates for the benefit of the American people.

China's economy is on a ventilator, the EU is a disorganized mess, the Ukraine-Russia conflict feels like watching a tennis match, and Canada can't quite decide how they want to engage with the United States.

As those of us in Real Estate are well-aware, President Trump is known for 'The Art of the Deal', so it remains to be seen if tariffs are actually about tariffs, or if they're about trying to cultivate leverage to foster new global opportunities for America.

While many view Trump's sweeping tariffs as checkers, I can't help but wonder (and hope) that he's playing chess. The future of America's solvency depends upon positive course correction over the coming years.

Regardless of the ultimate outcome of these tariffs (or any other extreme measure), it has become abundantly clear that proceeding with inaction, or maintaining a tolerance for the status quo, is America's largest and most systemic risk.

The most important question of all: Will this aggressive strategy payoff, or will a different one be required?

I suppose only time will tell.

Weekly Listen

This week's listen is not a Real Estate podcast, but instead, an episode of Modern Wisdom with host Chris Williamson and guest Naval Ravikant, the co-founder of AngelList.

If you're not familiar, Chris hosts deeply intellectual conversations with guests from all backgrounds, while Naval is known for his first principles, open-minded thinking, and his 2018 'Tweet Storm' titled "How to get rich (without getting lucky)".

If you're looking for a stimulating, insightful conversation about life, happiness, raising kids, culture shifts, self-esteem, and more, then you'll enjoy this episode.

If not, then I'll be back next week with a Real Estate podcast recommendation.

You can listen to the full episode here.