"Donald Trump’s reckless tariffs will cause chaos in our economy, raise prices for consumers and hurt hardworking American families. This is not a strategy — it’s the largest tax hike on the American people in history." Nancy Pelosi
To the rest of the world, Trump's tariffs are bad for world global economy. But they are silent on the tariffs they themselves have imposed on the US for decades.
In the US, the camp is divided. The Trump administration and supporters think it will make American economy stronger in the long term. There are others who say it's going to turn out to be a disaster for the country as increased cost of goods will burden the people. Then there is the strange case of another group of Americans who think tariffs are both good and bad, depending on who pushes the policy. The above two contradictory quotes are from Nancy Pelosi. In 1996 the tariff push by Democrat President Bill Clinton was good. The current Trump initiative is bad.
Countries impose tariffs according to their economic policies, economic development, security interests and social objectives. There is no country with absolute free trade. Singapore and Hongkong remain the only two free trade regimes, but there are still tariffs on alcohol, cigarettes, motor vehicles, petroleum products, sugar-sweetened beverages, other controlled items. The Heritage Foundation's Index of Economic Freedom for 2025 ranks Singapore as the country with the freeiest trade policies, followed by Switzerland, Ireland, Taiwan and Luxembourg. The ranking reflects a country's commitment to economic policies that promote openess, efficiency and competitiveness. Hongkong is not ranked as it is considered a part of China.
The mechanisms for tariffs take many forms, such as import duties, customs duties, excise duties, sin tax, and Singapore's unique COE (certificate of entitlement to purchase a new motor vehicle) and state subsidies for export goods. There are two other areas of unfair trade practices under the radar, but cannot escape the vigilance of the US. These are currency manipulation and value added tax which are two important sore points with the US.
In his first term, Trump acted against China for unfair trade practices, especially its policy of undervalued RMB. In response to Trump's action, China depreciated its currency, making its exports competitive to compensate the higher cost to American importers for their increase in import duties. Over several years the US have accused China, Singapore, Malaysia and a few other countries, of unfair trade practices by manipulating their currencies. Countries with trade surpluses experience upward pressure on their exchange rates which will make their exports less competitive. To prevent the exchange rates from rising, the central banks sell their currencies in open market operations. This means flooding the market with the local currency, keeping it undervalued. In the process the central banks accumulate massive amounts of foreign reserves. This is what makes Singapore and China's sovereign wealth funds build such massive portfolios as the central banks transfer foreign reserves in excess of needs to these state entities to invest. China Investment Corporation manages US$1.3 trillion assets as of March 2025, Singapore's GIC is too embarassed to mention their numbers. The Monetary Authority of Singapore has always defended its open market operations as strictly managing the daily liquidity and preventing wild fluctuations of the rates. However it has remained opaque for decades, never publishing data on its open market operations. Under pressure, MAS had no choice and in recent years it has been publishing its open market operations data, an analysis of which is possible to see whether the trading pattern supports the claim of rate suppression. Nevertheless MAS has continued to amass foreign reserves so much so in 2022 new legislation was passed to enable the Reserves Management Government Securities as a mechanism to facilitate the speedy transfer of foreign reserves to the sovereign wealth fund GIC. This is simply stating facts, no suggestion or nuance the MAS data on open market operations are unreliable.
Trump is the only prominent voice to declare VAT (Value Added Tax) is a tariff. And he is right. Singapore's GST is a form of VAT. Countries with VAT impose the tax on their imports paid for by importers and eventually by the end consumers. Almost all VAT countries do not impose the tax on their exports. In Singapore's GST system, exports are zero-rated, thus suffers no tax. To Trump, US products coming into Singapore are taxed at prevailing GST rate of 9%, but our exports to US are not taxed.
MFN (Most Favoured Nation) is a key principle in international trade under the World Trade Organisation framework. MFN status means a country must give another country the same trade advantages, like low tariffs, quotas, or trade rules, that it gives to any other trading partner. This establishes the basis of fairness for all members of WTO. When a member decides on a rate of tax for a particular product, or class of products, he must apply the same MFN rate to everyone. This is to prevent discrimination, promote equality and encourage trade liberation. However, countries are free to negotiate for better deals by FTAs (Free Trade Agreements) bilaterally or in blocs. Singapore has an FTA with the US.
Tariffs can be in several forms. Ad volarem is based on percentage of the values of goods. It can be a fixed fee per unit of goods. It can be a compound of both ad volarem and fixed fee. There may be quotas, above which the rates are much higher. There can be anti-dumping duties which are extra charges for goods deemed below market values. There are countervailing duties to offset foreign state subsidies.
It is thus almost impossible to determine what is the average tariff a country imposes on the US. Trump has criticised Canada for its massive 200% to 300% tariff on US goods which some smarty-pants fact check as false explaining those were above quota rates which have never been applied. The idiocy is astounding. Of course Trump was highlighting the ridiculous rates and the fact checkers precisely establish the point - the rates are so high Canadian importers are constrained by the quota.
It seems the Trump administration relied on a simple formula to determine the reciprocal tariff rates. Take the difference of imports from a country less exports to that country expressed as a percentage of the imports from the country, then multiply by 50%. For countries with which US has a surplus, the baseline 10% applies.
That explains why Singapore is hit with 10%. With our GST of 9% and currency manipulation, perhaps the baseline 10% works out equitably for Singapore after all.
Trump's objective for the tariffs seems to have a fast track evolution. He had initially intended it to be targetted tariffs to hit at manufacturing industries that American corporations outsourced to foreign countries. This will force manufacturing back to the US, thus reviving the industry that brings back jobs to the country. Trump then developed the idea for a US sovereign wealth fund that he envisioned will be the largest in the world within a very short time. With the US having a US$36 trillion national debt and perennial budget deficits, one wonders where the capital is coming from. This led to conspiracy theories of revaluation of gold reserves which is nonsensical since it ends up with a meaningless accounting profit. Trump spoke of monetising government assets, details of which no one knows. Most likely he is also envisioning the tariffs to help capitalise the sovereign wealth fund. Then Trump spoke of tariffs as a source of foreign revenue that will enable the government to reduce taxes. This is rather strange because tariffs are in effect paid for by American consumers, it is a form of tax. So it is using one form of tax to reduce another form of tax. Somewhat like our increase in GST offset by CDC vouchers.
Trump's formula of computing the reciprocal tariffs is simply based on 50% of the Trade Deficit Ratio with each country. This approach suggests the aim is to counterbalance perceived unfair trade practices which has contributed to the US trade deficit with each respective country.
There are disagreements within the Trump admin over the tariffs, which is healthy. In particular, Elon Musk and Peter Navarro are apparently on different wavelengths. When an 'X' commenter posted Navarro's video defending the tariff and highlighted his Harvard Phd in economics, Musk responded "A Phd in Econ from Harvard is a bad thing, not a good thing. Results in ego/brains>>1 problem." Musk replied "Yup" when another 'X' user quoted Thomas Sowell:
"In every disaster throughout American history, there always seems to be a man from Harvard in the middle of it."Indeed there are two Harvard Phd in Economics in Trump's inner circle. Stephen Miran is Chair of the Council of Economic Advisers and Peter Navarro who was Director of the Office of Trade and Manufacturing Policy in Trump's first term, and is now the Senior Trade Adviser. Both support Trump's tariff policies, viewing them as strategic tools to address trade imbalances and protect domestic industries. Miran focuses on the temporary nature and broader economic implications of the tariffs. Navarro emphasises the strategic necessity and long term benefits of the tariffs. When Navarro points out that Musk is an industrialist who is protecting his turf, the billionaire replied "He ain't built shit". He can't say same of Trump who has built big stuff. And Trump has his tariff ideas long before he had Miran and Navarro.
The possible eventual outcome of the tariffs depends on who one speaks to. All Trump-haters have only one view. The outcome will be devastating to global economy. It's a view out of honest conviction for some, and for many it is simply a political contrarian stand to anything Trump. Some are actively working to derail this tariff policy. It is a time when foreign lobby money is working hard, both in Democrat and Rupublican circles. Trump supporters are divided. Some are wary of the pitfalls of tariffs but majority think it will help right the unfairness of trade practices that have been stacked against the US for years.
China has retaliated by imposing increased tariffs against the US instead of reviewing US claims of unfair trade practices and negotiating for middle ground. Canada is whimsily flip-flopping on retaliatory tariffs. Singapore is disappointed at the 10% baseline tariff and will not retaliate. Argentina and Vietnam have said they will bring their tariffs against US to zero. Keir Starmer has said Trump's tariffs are fair and UK will not retaliate. Trump has also said 50 countries have called the White House to talk about it.
Whatever happenened to the MFN principle when China and Canada impose retaliatory tariffs against US? Perhaps MFN does not apply since US is not longer a member of WTO.
To use Trump's vocabulary, it is OK for other countries to screw the US, but the Americans are not allowed to screw them. Trump's tariffs are meant to level the playing field. However, without studying details of existing tariff structures, one cannot say for sure if other countries actually have higher tariffs against US which now face Trump's reciprocal tariffs. For example, the free trade regime of Hongkong, and the very low tariff countries of Switzerland and Taiwan, have also been slapped with high tariffs. A reciprocal tariff to re-calibrate unfair trade practices is an acceptable argument of equality. A reciprocal tariff to adjust trade deficits, which is what Trump's tariffs are all about, is not easy to justify since it does not address the underlying economic issues in the US. It is basically a country with a much higher cost base that has eroded its competitiveness.
(The next blog will discuss the structural traps of persistent trade imbalances which is the bigger picture, that will enlighten the understanding of the macro economics. Tariff wars is the micro issue.)
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