Treasury Secretary Scott Bessent justifies President Trump’s rapidly changing tariff policies on the grounds that they create strategic uncertainty.
Trump’s tariffs have three contradictory goals--raising revenue, protecting manufacturing, and negotiating leverage -- strategic uncertainty can plausibly be used to achieve only one of them.
Tariff uncertainty does not help domestic manufacturing. Uncertainty about the future of tariff policy severely undermines domestic manufacturing growth and development. Expansion of manufacturing takes years to complete, so constantly changing tariff policies makes it more difficult to know if investments will pay off. Investors need reasonable expectations about capital costs, input costs, and output prices to calculate whether expanded industrial capacity would be profitable. Constantly changing tariff policies make those calculations impossible.
Tariffs also undermine revenue generation from tariffs. Uncertainty makes it difficult for international businesses to plan. Bargaining over prices is challenging when firms do not know how goods will be taxed when they arrive at U.S. ports.
The only situation where uncertainty might be advantageous is in international negotiations. Constantly changing tariffs make it difficult for other governments to formulate a consistent response to American trade policies.
Trade policy uncertainty could help the United States in trade negotiations by showing how ruthless President Trump is. A leader who is willing to hurt his own country to try to hurt other countries is a potentially challenging adversary. In game theory, this is called strategic irrationality, which is useful in hawk-dove games, which is useful for describing situations with conflict or contestation. Players have two strategies: peace and aggression. The worst outcome occurs when both players choose aggression; the second-best outcome occurs when both choose peace. However, the best scenario for a player is if he chooses aggression while the opponent chooses peace. That scenario is also the equilibrium solution to the game; no one has an incentive to change strategies once one player has chosen aggression and the other has chosen peace.
The problem is figuring out who will choose which strategy. That’s where strategic irrationality comes in. Whoever is better at convincing his opponent that he is more willing to endure the costs of both players choosing aggression will get the more favorable equilibrium.
So it might have been more accurate for Bessent to try to justify the rapidly changing tariff policies in terms of strategic irrationality rather than strategic uncertainty. That President Trump wants to use strategic irrationality, however, accords well with the logical contradictions in his program. But the harm caused by the tariffs and the uncertainty clearly shows that the president is comfortable (unconstitutionally) imposing serious harm on his own country. That fits the bill for strategic irrationality.
At any rate, the game-theoretic reasons for creating uncertainty and acting irrationally are relevant to conflict, not trade. Uncertainty and irrationality are poor strategies when dealing with allies and trading partners, who are increasingly agitated by Trump’s policies.
It is unclear exactly how America will benefit from the deals President Trump expects to make. Good deals would certainly lower tariffs. But if he wants to claim that the uncertainty and arbitrariness are strategic and beneficial for America, the deals must make America significantly better off than it was before “Liberation Day.”
Trump’s tariffs have done nothing but harm so far to the stock market, the dollar, and the economy. With each passing day, it seems increasingly unlikely that there is method in his madness.
