Let's talk about Tariffs?
The end of free trade, or the beginning of American Renaissance?
As you may have noticed, the current US government is raising tariffs on all kinds of products from all kinds of countries. Some people think it's good. Some people think it's bad, personally I have no idea. It seems to be working in the way of leverage on other countries, but I don't understand the dynamics of tariffs and how it would play out in 6, 18 and 36 months from now. Time will have to tell. For now what I can do is look at the past and see if some smart people have said anything helpful for this situation. Let’s turn to Warren Buffett, a billionaire investor and CEO of Berkshire Hathaway, renowned for his decades-long track record of consistently outperforming the market. Maybe he’s got the answers.
In 2003, Warren Buffett wrote an article warning about the growing U.S. trade deficit, highlighting how it was transferring American wealth abroad and increasing foreign ownership of U.S. assets.
He argued that this imbalance would eventually burden future generations with higher payments to foreign entities. To address this, Buffett proposed a market-based solution called Import Certificates (ICs), which would require importers to purchase certificates tied to the value of U.S. exports. This system would link imports directly to exports, aiming to balance trade, boost U.S. competitiveness, and avoid the downsides of more aggressive measures like tariffs.
What did Buffett Want?
Here is my summary of the the main points from Warren Buffett's article. If you are curious, you should read the original PDF.
Trade Deficit: Buffett warns that the U.S.'s growing trade deficit is transferring the nation's wealth abroad at an alarming rate, likening it to selling off pieces of a family farm to sustain consumption beyond production.
Historical Context: Post-World War II until the 1970s, the U.S. was exporting more than it imported and investing surpluses abroad. Since the late 1970s, this reversed, with deficits growing to over 4% of GDP by 2003, and foreign ownership of U.S. assets was greater than U.S. ownership abroad.
Foreign Dependency: Buffett illustrates how a trade deficit leads to dependency. Countries that consume more than they produces eventually lose ownership of its own land and face intergenerational inequity.
Consequences of Inaction: If unchecked, the deficit will increase foreign ownership of U.S. wealth by about 1% annually (from 2003), shifting the U.S. from a net receiver to a net payer of investment income, leading to "negative compounding."
[[ Essentially where we are today — As of 2025 The U.S. government paid approximately $1.13 trillion in interest on its national debt in fiscal year 2024, surpassing defense spending for the first time, and this trend is expected to continue, with interest costs rising to nearly $1.8 trillion by 2035. Note that this isn’t money paid for any good, nor is it to pay off our debt, this is simply the interest for the money we already owe to our creditors ]]Special U.S. Status: The U.S. can sustain large deficits due to its historical financial credibility and wealth, but this "credit line" is not infinite, and other nations cannot easily ditch dollars due to the trade imbalance.
Proposed Solution - Import Certificates (ICs): Buffett suggests issuing Import Certificates to U.S. exporters equal to their export value, which importers must buy to bring goods into the U.S. This would balance trade by tying imports to exports, boosting U.S. competitiveness without targeting specific industries or sparking trade wars.
Mechanics and Impact: ICs would trade in a liquid market (e.g., at 10 cents per dollar of exports), incentivizing exports and raising import costs. This could increase U.S. jobs and exports while forcing foreign sellers to adjust, potentially encouraging them to buy more from the U.S.
Drawbacks: The plan would raise prices for imported and some domestic goods, acting as a consumer tax, but Buffett argues this is less painful than a declining dollar or traditional tariffs/quotas.
Global Reaction: Exporting nations might initially resist but would likely adapt by increasing imports from the U.S. rather than starting trade conflicts, given the U.S.'s position as a major debtor needing balance.
[[ sounds familiar? ]]Urgency and Optimism: Buffett stresses the need for action to halt wealth outflow, acknowledging past resilience but warning against complacency. He believes ICs are a practical, market-friendly solution to a pressing problem.
Fast forward to 2025, and the U.S. has raised tariffs on all other countries as a response to the trade deficit—a move that aligns with the goal of reducing imports but diverges significantly from Buffett's logic and proposed solution.
Note by the way, this is happening while stock market is down, which maybe unpleasant for the US consumer, but is also putting an immense pressure on foreign asset holders to play by our rules.
Let’s break down how this tariff policy plays into Buffett’s thinking:
Buffett’s Logic and the IC Plan
Market-Driven Approach: Buffett’s IC system was designed to balance trade organically by incentivizing exports. Exporters would earn certificates, which importers would then buy, creating a self-regulating mechanism. This avoided direct government intervention like tariffs.
Avoiding Disruption: Buffett believes ICs would minimize economic pain—no sharp increases in consumer prices or risks of trade wars—while still addressing the wealth transfer abroad.
Long-Term Focus: Buffett saw the trade deficit as a slow erosion of U.S. economic power, warning that America’s ability to run deficits (thanks to its special economic status) wasn’t infinite. His solution aimed to correct this gradually without destabilizing global trade.
Tariffs in 2025: A Different Path
Blunt Instrument: Raising tariffs on all countries is a more aggressive, direct approach. By making imported goods more expensive, it aims to reduce the trade deficit by discouraging imports. However, unlike Buffett’s ICs, it doesn’t inherently encourage exports—the other half of the trade balance equation. [[ or does it? I don’t know ]]
Higher Costs: Tariffs increase prices for consumers and businesses reliant on imports, a drawback Buffett explicitly sought to avoid. His IC plan shifted incentives without broadly raising costs.
Risk of Retaliation: Tariffs often provoke trade wars, as other countries may impose their own tariffs on U.S. goods [[ as they have ]]. Buffett’s IC system was crafted to sidestep such conflicts, maintaining smoother global trade relations.
Alignment and Divergence
The current tariff policy shares Buffett’s concern about the trade deficit and the need to act before the U.S.’s “credit line” runs out. However, it departs from his logic in execution:
Intent Matches, Method Doesn’t: Both aim to curb the deficit, but tariffs are a protectionist tool, while ICs were a market-driven fix. Buffett favored nuance over blunt force.
Unintended Consequences: Tariffs could harm the U.S. economy through higher costs and reduced competitiveness—outcomes Buffett’s plan avoided. For example, if trading partners retaliate, U.S. exporters might suffer, widening the deficit in the long run.
So, what do we do about tariffs ?
Raising tariffs in 2025 reflects a sense of urgency about the trade deficit that Buffett flagged in 2003.
Tariffs are a heavier-handed approach that might address the symptom (too many imports) but risks missing the root cause (not enough exports) and creating new problems. In Buffett’s logic, this move might be seen as a step in the right direction but executed with a tool less elegant and more risky than what he had in mind.
So overall, we are doing now what we should’ve done 20 years ago. In 2003 though, when Buffett wrote his letter, the US national debt was 6.7 trillion dollars. Today the US National Debt sits at 37 trillion dollars and growing.
We paid more in interests payments last year than was our total military spending. It’s an unsustainable growth, and the country is on the verge of going bankrupt like that.
My view is that whether you like or not, doing the same things as what got us into this mess is simply not an option anymore. Tariffs might be harsh, might lead to consequences, but we don’t have a better alternative. Buffett was right in 2003, but in 2025 we ran out of time and cannot go gentle on the economy anymore, we have to use forth.
That’s my opinion as of now, I’d love to know yours!
Have a fantastic day.
Kirill Zubovsky