President Donald Trump has expanded his tariffs to include a new 25 percent tariffs on all trucks and cars and automobile parts being imported into the U.S. in a March 26 proclamation, citing national security concerns with outsourced automobile production, stating, “automobiles and certain automobile parts are being imported into the United States in such quantities and under such circumstances as to threaten to impair the national security of the United States.”
Trump cited a February 2019 report by then-Secretary of Commerce Wilbur Ross that highlighted defense production interests being upheld by a strong U.S. auto industry, stating, “Many of the most important innovations and technological advancements over the past 100 years have come from the automotive sector, and the strength of this sector drives technological advancements in the defense sector. Today, the defense sector is heavily interconnected and reliant on the automotive industry for R&D to meet current and future military requirements such as vehicle electrification, autonomous driving, hydrogen fuel cell products, advanced semiconductor utilization, radar, laser and sonar ranging, global positioning system (‘GPS’) navigation, anti-lock brakes, reduction in vehicle weight (‘lightweighting’), and fuel efficiency efforts. Product development in partnership between U.S. automotive manufacturers and defense agencies results in technological advancements in military aircraft, space aircraft, unmanned aerial systems, missiles, and submarines.”
But that a weakening U.S. auto industry would invariably harm national security, stating, “the United States’ automobile industry’s technological leadership in innovation is quickly diminishing. In conducting this investigation, the Secretary has found that significant import penetration over the course of the past three decades has severely weakened the U.S. automotive industry, as American-owned production of automobiles and automobile parts has been reduced by imports and the domestic manufacturing base has weakened. Overall, the share of global R&D investments in the automotive sector attributable to the United States has significantly declined and, today, the share of R&D conducted by American-owned companies is a fraction of the share conducted by foreign competitors. If production volumes continue to decline domestically, the United States’ contribution to automotive R&D will further weaken and will impede the automobile industry’s ability to invest in the development of technologies that are imperative to maintaining a leading edge in U.S. military capabilities.”
Specifically, at a time of war or national emergency, the U.S. military needs to be able to rely upon domestic production: “in the procurement of military equipment, including military vehicles, automobiles, and automobile parts, the United States’ Department of Defense (“DOD”) relies predominantly on suppliers located in the United States, both American-owned and foreign-owned. However, because in a time of national emergency, foreign-owned suppliers operating in the United States may not be reliable sources of equipment, the DOD must be able to rely on a sufficient presence of American-owned manufacturers for its military needs.”
At the time of the report, Trump deferred publication of the report in the interests of completing the U.S.-Mexico-Canada (USMCA) trade agreement, but it eventually was released in July 2021 during former President Joe Biden’s term office. At the time, in January 2020, it was determined in an Department of Justice Office of Legal Counsel opinion that the report fell under executive privilege and was “confidential presidential communication, the disclosure of which would risk impairing ongoing diplomatic efforts to address a national-security concern. Disclosure would also risk interfering with Executive Branch deliberations over what additional actions, if any, may be necessary to address the threat.”
But, now in his second term, President Trump is directly acting on the report in helping the U.S. auto industry to recover from decades of outsourcing by bringing production back to the United States. No more time to waste.
For companies that want to avoid the 25 percent tariff, it’s simple: Just build the cars in America.
The news of Trump’s new tariffs come in anticipation of the April 2 reciprocal tariffs that will match other countries’ tariffs on U.S. goods, which also appear to be long overdue to rebalance U.S. trade policy just to meet the taxes other countries are levying U.S. exports. For decades, the U.S.
But trade barriers can include monetary barriers, too. In just the past year, the Canadian dollar has depreciated against the U.S. dollar by 5 percent and the Mexican peso has depreciated by 18.3 percent. By any definition, these are competitive devaluations — forbidden by the USCMA — to cheapen exports to the U.S. that should also be considered.
Financially, further devaluations by trade partners — which should be anticipated — will have the near-term, relative effect of strengthening the dollar, which in turn could result in falling commodities prices, given the inverse relationship between commodities and the dollar, too, with a strong dollar correlating with lower commodities prices and a weak dollar correlating to higher commodities prices.
Meaning, the tariffs, could actually help cut inflation, despite Congressional Democrats’ proclamations that tariffs are inflationary when a lot depends on how trade partners respond.
This is where President Trump’s proposed sovereign wealth fund could make a big difference in not only helping to bolster U.S. production and balance trade, but also shore up fiscal policy, with a report due to the President on May 3 outlining the structure of the fund.
Namely, the federal government is sitting on some $7.3 trillion of intergovernmental holdings of non-marketable U.S. treasuries in various trust funds including but not limited to the Social Security and Medicare trust funds.
Want to fight inflation, Mr. President? You could direct the Treasury and other departments to begin selling some of those trillions of dollars’ worth of treasuries, directly taking money out of circulation. Similar to Federal Reserve open market operations, this could bolster efforts to temporarily strengthen the dollar to combat inflation. But there are side effects, as dumping treasuries increases their public supply, thereby temporarily increasing interest rates. On the other hand, reducing inflation could ultimately help rates come down as institutional investors hedge against potential slower growth by buying bonds.
At appropriate times, the sovereign wealth fund could also reinvest those monies in U.S. companies — broad indices like the S&P 500 could be invested in, for example — likely getting a much better return on investment than the average interest rate of 4.1 percent, and an effective interest rate of 2.4 percent in 2024, for the Social Security-held treasuries, according to the Social Security administration. This could be done at times of market lows, and could have the impact of temporarily weakening the dollar, which can be useful if other countries, whether Canada and Mexico, but also China, are utilizing competitive devaluations.
Long term, this could help grow the trust funds, which for Social Security and Medicare will be exhausted in the 2030s. Why sit around and wait for that to happen? Just go get a better rate of return. Maybe see what stocks members of Congress are buying, which often appear to outperform even the indices. Or just get the best institutional investors to assist the Treasury in making sound decisions for the fund. Not only is this also long overdue, but it’s really a race against time, thanks to lower fertility globally and the aging workforce, there are far fewer taxpayers than there would have been to support the Baby Boomers’ retirements.
Taken broadly, President Trump is potentially killing a lot of birds with just a few stones.
Likely, through a combination of these policies — tariffs, treasuries sales and sovereign wealth fund investments — the President is creating ready tools for all future presidents regardless of party to restore American manufacturing, bolster national security, fight inflation and shore up the nation’s fiscal health. They can thank him later.
Robert Romano is the Executive Director of Americans for Limited Government Foundation.
Reproduced with permission. Original here: President Trump’s Tariffs And Sovereign Wealth Fund Can Restore American Economic Primacy, Cut Inflation
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