Changing Tariffs in a Complex System
- Redmond Asset Management, LLC
- 14 minutes ago
- 5 min read
There was much handwringing surrounding the tariffs introduced during Trump’s first term. We feel much of the handwringing had to do with an amplification of tone deaf (or worse) conveyance of the message from the administration by anxious (or worse) media coverage. It helps us to realize that the Biden administration by and large left Trump’s tariffs in place or increased the tariffs. And here we are again.
Our mentors have been quick to point out, by their estimation, that the Great Depression would most likely have been a severe recession were it not for the Smoot-Hawley Tariff Act of 1930. At first, Smoot-Hawley was an attempt to protect farmers struggling to compete against imports but was slowly expanded to protect other sectors. A key element was that Smoot-Hawley offered no particular incentives to foreign trading partners, who in turn created retaliatory tariffs, and a major slowdown in international trade. International trade was fairly modest at the time, at approximately 10% of GDP in the late 1920s by our estimation(1,2), but large enough that a major slowdown in global trade had a material effect. Today global trade represents approximately 25% of US GDP, and students of Smoot-Hawley have reason to be on high alert.(3)
This all lead to the Reciprocal Trade Agreements Act of 1934 which granted the president authority to negotiate with foreign heads of state to reduce tariffs in both directions, and material improvements were made in global trade. The Reciprocal Trade Agreements Act created a shift in sentiment away from isolationist and protectionist, until World War II. The General Agreement on Tariffs and Trade (GATT) was created 1947 and fit hand in glove with the U.S.’s Marshall Plan of 1948. Together these agreements were designed to help Europe rebuild following World War II by boosting economic activity via having all members of GATT treated the same when it came to tariffs. However, the U.S. was not a member of GATT, and tariffs on U.S. goods were maintained at higher levels than for member countries. The Marshall Plan shrank until funding ended in 1952 because Europe had been successfully rebuilt. GATT, however, remained in place as the mutual benefits were enjoyed by GATT members. GATT ultimately became large enough to function better as an institution, and from GATT the World Trade Organization (WTO) was born in 1995. Unlike the Marshall Plan, the tariff disparity that the U.S. accepted in 1947 to help rebuild Europe was never adjusted after Europe was rebuilt.
We could walk through the histories of trade with other countries and regions, but the theme is generally consistent. Today the U.S. is justifiably seeking to update tariff disparities. The way in which the U.S. is going about this is chaotic, mis-prioritized, and unsettling on so many levels, that in our view it can only be a negotiating tactic. In our view, it is possible to do the right thing so badly that it is as if the wrong thing was done. When thinking about the future it is important to consider the broad nature of the systems in place.
Simple, Complicated, and Complex Systems
For simple systems think of baking a cake. There are a few measured ingredients that interact in a straightforward manner. The outcomes are predictable, but if something goes wrong it is relatively easy to identify and fix the problem with another attempt.
For complicated systems think of the tax code. There are many lines which are not always relevant. Specialized knowledge is usually required to determine how the various lines interact and to be confident in the output. If something goes wrong, it may not be easy to quickly identify the problem.
For complex systems think of an ant colony or beehive. There are almost too many ants or bees to count, and each is unintelligent. It is nearly impossible to predict exactly how each ant or bee will interact with all the others, yet cunning intelligence is an emergent property of the colony or hive.
It seems to us the U.S. is treating global trade as if it were a simple system in which the U.S. flexes, and the world falls in line. We believe that global trade is far from a simple system, the dynamics are fluid enough to be beyond a complicated system, and we view it as a complex system. After Russia invaded Ukraine, tremendous sanctions were imposed on Russia by the U.S., E.U., and U.K. Sanctions included banning Russian banks from the SWIFT international payments system, freezing hundreds of billions in assets, bans, restrictions, and price caps on imports and exports. It would seem that these sanctions should have crippled Russia to the point of capitulation, yet new dynamics emerged. Russia developed alternate financial networks and trade networks, especially with China and India. Other countries have taken note and may be wondering what life would be like with less involvement with the U.S.
With approximately 25% of U.S. GDP coming from global trade, it would be wise not to incentivize countries around the globe to reimagine financial and trading dynamics. We feel that it is not too late to walk back the errors of Liberation Day, but the risks will remain quite high in the short run. Furthermore, we expect all this uncertainty on top of an economy that has been growing more slowly will likely tip the U.S. into a recession.
The best buying opportunities come in nasty bear markets. These are the sorts of buys that you never forget and talk about at cocktail parties. We will continue to refine our list of things to buy and do our best to think about when to buy them.
Redmond Asset Management, LLC April 2025
The opinions contained in the preceding commentary reflect those of Redmond Asset Management, LLC (RAM). The stated opinions are for general information only and are not meant to be predictions or an offer of individual or personalized investment advice. They also are not intended as an offer or solicitation with respect to the purchase or sale of any security. This information and these opinions are subject to change without notice. Any type of investing involves risk and there are no guarantees. Redmond Asset Management, LLC does not assume liability for any loss which may result from the reliance by any person upon any such information or opinions.
Redmond Asset Management, LLC is an independent, SEC registered investment management firm located in Richmond, VA and is not affiliated with any parent organization. RAM was founded in 2005 and registered with the SEC on December 22, 2005. The company offers investment management services for equity, balanced and fixed income portfolios to corporate, institutional, and individual investors.
