Sectoral tariffs can actively tilt global supply chains in major market segments toward the U.S. By raising the dollar cost of goods made offshore, they shrink the labor- and transport-cost arbitrage driving offshoring. We have already seen multinationals in key economic segments like pharmaceuticals say they will invest more in the U.S. to avoid tariffs.
Section 232 protects critical industrial capacity tied to national security and can be tailored to specific industries where heavy import dependence creates supply-chain risks during geopolitical or economic shocks,” said Rechenberg.
Tariffs should generally escalate with value-added so that finished goods competing directly with domestic producers face stronger barriers than upstream materials. Many aluminum companies here are faced with this problem today, despite supporting the 50% steel and aluminum tariff.
At the same time, input treatment must be selective, not automatic, said Rechenberg.
“Blanket zero-tariff exemptions for inputs would hollow out critical upstream sectors like steel and weaken domestic supply chains, yet poorly designed raw-material tariffs can also squeeze downstream producers, as we’ve seen with aluminum products,” he said. “The objective is a disciplined and targeted trade policy that provides clear, predictable rules and avoids the business uncertainty created by ad hoc tariffs driven by short-term politics or used primarily as negotiating leverage.”
The key indicators for tariff success ultimately rest on production increases, wage growth, and employment in critical sectors. Long-term import penetration in strategic sectors erodes manufacturing capacity, weakens labor markets substantially, and destroys entire industrial ecosystems that take years to rebuild. The U.S. is dealing with this now, which is why imports remain so high. We have lost entire pieces of the supply chain to foreign suppliers as multinationals found it cheaper to buy in large quantities from Mexico and Asia.
The intellectual argument for tariffs goes beyond trade and into Main Street households. When wage growth stagnates, households become more vulnerable to rising costs in non-tradable sectors and services inflation. The “cost of living” narrative hurts those whose wages fail to keep up with rising costs. Persistent import penetration has weakened many of the high-productivity sectors that historically supported middle-class wage growth. Restoring domestic production capacity strengthens long-term earning power and regional economic stability. People don’t consume themselves to wealth. See China as Exhibit A. (Though China can only be Exhibit A because the world consumes what they produce.)
“Properly designed tariffs can strengthen market competition,” said Rechenberg. “They neutralize subsidies and state-directed industrial policies abroad that distort global markets and prices.”
Some costs will be borne by consumers, though not uniformly. Tariff costs are distributed across the supply chain, with exporters, U.S. importers, distributors, and retail also all absorbing part of the cost. Some adjustments will also fall on capital markets and corporate strategy. A trade and industrial policy of this scale is complex. But complexity is not an excuse for paralysis. A return to the status quo means investment flow to Asia; it means advanced manufactured goods are also increasingly offshored. Cars and trucks will almost completely be gone to Mexico over time.
When thinking about tariffs as a durable tool of statecraft, the foundation should be clear: a modest baseline tariff that generates stable revenue to offset taxes, paired with targeted Section 232 tariffs that preserve critical industrial ecosystems. Tariffs are less about punishing importers and more about enticing investment in production. If capital flows to Asia because labor is cheaper and scale is subsidized and outmatched, then tariffs must be a tool to incentivize home market production.
“The administration should develop better, more granular measures of domestic production, make them public, and measure actual levels of domestic production and domestic market share at the appropriate granular level,” said Jeff Ferry, CPA’s chief economist emeritus. CPA pioneered this at the sectoral level with the Domestic Market Share Index. Up to now, commitments to reshore have been achieved more through the threat of tariffs than actual tariffs. “This raises the question of how well the price mechanism actually works. Some industry tariffs may only be effective if they reach a level like 25%. All these issues need to be studied and publicized,” Ferry said.
The record 2025 trade deficit does not mean tariffs failed, but it makes the case for refinement – new decisions, long term action planning. We have observed. We have oriented. The question now is whether we will decide and act beyond short term fixes like Section 122. If not, we can always continue bemoaning trade imbalances and wonder why imports keep replacing the locals as we watch them head offshore in order to stay in business.
Why 2025’s Record Breaking Trade Deficit Doesn’t Hurt the Argument for Tariffs
It was no surprise that the 2025 goods deficit broke another record, the Bureau of Economic Analysis (BEA) numbers showed recently. The year-ending goods deficit was $1.24 trillion, up from $1.21 trillion in 2024, with the monthly deficit for December looking like historic averages, nearly $100 billion. Nothing seems to stop America’s appetite for imports.
Record breaking tariffs, yet record breaking imports. Tariffs are meant to curb imports and entice extra capacity and investment at home. At first glance, that does not look like the case at all, setting the narrative for the anti-tariff crowd that the America First trade agenda has failed. The trillion dollar-plus deficit can hurt Trump’s messaging on tariffs.
There is a twist to all of this.
If not for tariff front running in the first quarter, we would not have beaten last year’s record. The U.S. recorded a $464.4 billion deficit in those three months before the majority of tariffs were implemented, nearly half of the full year’s total. The median goods deficit was $154.8 billion per month in the first quarter, by far a record.
The last three quarters of 2025 actually showed falling trade deficits as tariffs were introduced. The U.S. trade deficit from April 2025 through December 2025 totalled $879 billion. During the same time period in 2024, the trade deficit totalled $1.03 trillion.
Also, the biggest source of our deficit was computer hardware and pharmaceuticals. We can safely conclude that is largely due to AI data center build-out, and GLP-1 drugs.
The U.S. imported $101 billion more in computers, with $72 billion more in computer accessories and telecommunications equipment, in 2025 than in 2024. We imported $40.2 billion more in pharmaceuticals. To put that into comparison, U.S. passenger car imports fell by $34 billion from 2024, truck imports fell by $10 billion and crude oil imports fell by $27.5 billion. In addition to computers and pharmaceuticals, the BEA lists “finished metal shapes” imports doubled, increasing by $53.5 billion to $105.3 billion in 2025. These numbers likely speak to the problems within the Section 232 steel and aluminum tariffs at the moment. There are holes in those tariffs that need to be plugged as companies here are importing raw material, like aluminum, and paying tariff rates, while facing competition from importers for finished goods at home. Those importers do not pay tariffs on raw steel and aluminum in their countries, for example.
The BEA’s year-end numbers show us that the U.S. is observably a big, net importer of goods. It shows us that even as tariffs kicked in fully in August after a three month pause, imports slowed only in October before returning to their usual monthly values.
We also can understand these 2025 numbers better by recognizing that these figures are distorted due to the 1Q25 pre-IEEPA tariff announcement in April; record computer equipment purchases for AI; and new “wonder drugs” like Ozempic imported from Europe. Lastly, the trade deficit as a percentage of GDP has declined thanks to larger economic growth.
To put that simply, we still have a hundred thousand dollar deficit funded by credit cards and bank loans, but this year we got a raise and made $120,000 instead of $100,000 so it does not look as bad.
Last year’s trade data must be interpreted within a framework of an ever evolving tariff strategy.
The OODA Loop Applied to Tariff Strategy
The OODA loop (observe, orient, decide, act loop) is a decision-making model developed by the Air Force in the 1970s. The OODA loop is a continuous collection of feedback and observations designed for decision makers to take action, and be flexible. Plans change. Things have to be tweaked.
J.P. Morgan CEO Jamie Dimon says he uses this decision making framework to run America’s biggest bank.
And so with 2025 out of the way, we have the observable data from tariff year one, and know why it looks that way. As the year 2026 began, the Supreme Court killed Trump’s IEEPA tariffs, setting the table for fast action in the form of Section 122 tariffs, good for only five months. New Section 232 tariffs are in the works. In the meantime, new tweaks to the tariff regime are necessary to make them work as intended. Five months will come and go.
We have reached the point where we have to decide what we want to use tariffs for.
“A 10% baseline revenue tariff, plus a stacking Section 232 is the most effective approach moving forward,” said Andrew Rechenberg, senior economist for CPA.
Reciprocal tariffs, as the IEEPA tariffs were often referred to, set the stage for the U.S. to open up to more imports in favor of a trading partner agreeing to buy more commodities or capital goods. This is usually always a lopsided trade – a country agrees to import more LNG and buy some Boeings, in favor of lower tariffs overall that overwhelmingly benefit foreign producers. When the country does not need all that LNG, or when LNG becomes too expensive versus alternatives, they’re out, the agreement is difficult to enforce, and yet our market still remains open.
For over a century, U.S. tariff acts have empowered presidents to adjust tariffs to “non-tariff barriers” that effectively discriminate against U.S. exports. Setting tariffs in reaction to policies in other countries doesn’t work, as demonstrated through generations of U.S. trade policy. The U.S. needs to set tariffs according to the conditions and needs of our own domestic economy.
If revenue is a part of the answer – and it should be – the House and Senate already have a bill in place to legislate a 10% revenue tariff. This revenue was forecast in the ‘Big Beautiful Bill’ as a means to pay for tax cuts. A baseline revenue tariff is a stable, modest and predictable duty for everyone, as opposed to different national tariffs based on trade deficits with those countries.
“The 10% baseline tariff provides a substantial and stable revenue base,” said Rechenberg. “Our modified GTAP model estimates that a universal 10% tariff would generate about $263 billion annually. This revenue can be recycled into lower-income tax rebates of roughly $1,200 and middle-income tax cuts equal to about 3-4% of income. This shifts part of the tax burden away from domestic labor and income and onto imports, reducing taxes on work and production while reinforcing domestic investment.”
Alexander Hamilton wrote in “Report on the Subject of Manufactures” in 1791: “To cherish and stimulate the activity of the human mind… must be among the most important objects of public policy.” For Hamilton, tariffs were both protection and tools of national development. The U.S. is still developing. We are moving into the automatic, and perhaps cybernetic factories of the future. Who is going to build this equipment? Entire ecosystems have to be built or repaired.
If the U.S. cannot entice multinationals to build that ecosystem here, and source manufactured goods from domestic contractors, or at least within the USMCA, then the trend is clear – they are moving to Asia. Prior to the 2017 Section 301 tariffs on China, that was the implied direction on trade and investment.
– Trump is Reviving a Great American Tariff Tradition by Charles Benoit, CPA Trade Counsel, for The American Conservative, June 1, 2025
The real tariff action is in perfecting the Section 232 tariffs. These will require tweaks. Not everyone is pleased with how they have been rolled out so far.
The Intellectual Argument for Tariffs
Sectoral tariffs can actively tilt global supply chains in major market segments toward the U.S. By raising the dollar cost of goods made offshore, they shrink the labor- and transport-cost arbitrage driving offshoring. We have already seen multinationals in key economic segments like pharmaceuticals say they will invest more in the U.S. to avoid tariffs.
Section 232 protects critical industrial capacity tied to national security and can be tailored to specific industries where heavy import dependence creates supply-chain risks during geopolitical or economic shocks,” said Rechenberg.
Tariffs should generally escalate with value-added so that finished goods competing directly with domestic producers face stronger barriers than upstream materials. Many aluminum companies here are faced with this problem today, despite supporting the 50% steel and aluminum tariff.
At the same time, input treatment must be selective, not automatic, said Rechenberg.
“Blanket zero-tariff exemptions for inputs would hollow out critical upstream sectors like steel and weaken domestic supply chains, yet poorly designed raw-material tariffs can also squeeze downstream producers, as we’ve seen with aluminum products,” he said. “The objective is a disciplined and targeted trade policy that provides clear, predictable rules and avoids the business uncertainty created by ad hoc tariffs driven by short-term politics or used primarily as negotiating leverage.”
The key indicators for tariff success ultimately rest on production increases, wage growth, and employment in critical sectors. Long-term import penetration in strategic sectors erodes manufacturing capacity, weakens labor markets substantially, and destroys entire industrial ecosystems that take years to rebuild. The U.S. is dealing with this now, which is why imports remain so high. We have lost entire pieces of the supply chain to foreign suppliers as multinationals found it cheaper to buy in large quantities from Mexico and Asia.
The intellectual argument for tariffs goes beyond trade and into Main Street households. When wage growth stagnates, households become more vulnerable to rising costs in non-tradable sectors and services inflation. The “cost of living” narrative hurts those whose wages fail to keep up with rising costs. Persistent import penetration has weakened many of the high-productivity sectors that historically supported middle-class wage growth. Restoring domestic production capacity strengthens long-term earning power and regional economic stability. People don’t consume themselves to wealth. See China as Exhibit A. (Though China can only be Exhibit A because the world consumes what they produce.)
“Properly designed tariffs can strengthen market competition,” said Rechenberg. “They neutralize subsidies and state-directed industrial policies abroad that distort global markets and prices.”
Some costs will be borne by consumers, though not uniformly. Tariff costs are distributed across the supply chain, with exporters, U.S. importers, distributors, and retail also all absorbing part of the cost. Some adjustments will also fall on capital markets and corporate strategy. A trade and industrial policy of this scale is complex. But complexity is not an excuse for paralysis. A return to the status quo means investment flow to Asia; it means advanced manufactured goods are also increasingly offshored. Cars and trucks will almost completely be gone to Mexico over time.
When thinking about tariffs as a durable tool of statecraft, the foundation should be clear: a modest baseline tariff that generates stable revenue to offset taxes, paired with targeted Section 232 tariffs that preserve critical industrial ecosystems. Tariffs are less about punishing importers and more about enticing investment in production. If capital flows to Asia because labor is cheaper and scale is subsidized and outmatched, then tariffs must be a tool to incentivize home market production.
“The administration should develop better, more granular measures of domestic production, make them public, and measure actual levels of domestic production and domestic market share at the appropriate granular level,” said Jeff Ferry, CPA’s chief economist emeritus. CPA pioneered this at the sectoral level with the Domestic Market Share Index. Up to now, commitments to reshore have been achieved more through the threat of tariffs than actual tariffs. “This raises the question of how well the price mechanism actually works. Some industry tariffs may only be effective if they reach a level like 25%. All these issues need to be studied and publicized,” Ferry said.
The record 2025 trade deficit does not mean tariffs failed, but it makes the case for refinement – new decisions, long term action planning. We have observed. We have oriented. The question now is whether we will decide and act beyond short term fixes like Section 122. If not, we can always continue bemoaning trade imbalances and wonder why imports keep replacing the locals as we watch them head offshore in order to stay in business.
MADE IN AMERICA.
CPA is the leading national, bipartisan organization exclusively representing domestic producers and workers across many industries and sectors of the U.S. economy.
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