Free traders love to call tariffs a tax on consumers. The Wall Street Journal editorial board practically breaks into hives at the thought of an import duty. Tariffs, they insist, distort the market. They pick winners and losers. They make us all poorer.
All of this would be very persuasive—if we lived in the world of Econ 101, where trade is always voluntary, markets adjust perfectly, and governments don’t cheat. But in the real world, global trade imbalances are not the result of free exchange—they’re the result of an unsustainable rigged system created by state intervention. And tariffs aren’t a distortion. They’re a correction—a necessary counterweight to the economic distortions China and other mercantilist nations have already imposed on the system.
Tariffs, in short, aren’t the problem. They’re the solution.
China’s Hidden Trade Distortions: Pettis’s Great Insight
Ask yourself this: why has the U.S. run massive trade deficits for decades, while China has posted massive trade surpluses? Is it because the Chinese are just naturally better at making things? Because Americans are genetically predisposed to import widgets instead of manufacturing them?
Of course not. China’s trade surplus isn’t a natural market outcome—it’s a function of state policy.
Few have explained this better than Michael Pettis, a professor of finance at Peking University. Pettis has spent years exposing the real mechanics behind China’s trade model: China’s economic policies suppress domestic consumption in favor of manufacturing and exports, and the cost of this distortion gets exported to the U.S. and other trade partners.
Beijing’s policies systematically redirect income away from households and toward producers by suppressing wages, limiting capital outflows, and manipulating interest rates. Wages remain artificially low, ensuring that labor doesn’t get its fair share of economic output. Interest rates are kept below market levels, reducing household savings returns while making capital cheaper for industrial expansion. Capital controls prevent Chinese investors from seeking better returns abroad, meaning domestic savings get funneled into the state-directed financial system, fueling industrial overcapacity rather than consumption. And to ensure that China’s exports remain competitive, the government has long intervened in currency markets to keep the yuan undervalued.
The result is an economy that produces far more than it consumes. Rather than allowing wages and domestic demand to rise naturally, China exports its economic distortions—flooding global markets with artificially cheap goods while accumulating massive trade surpluses. Someone has to absorb that excess production, and for decades, that role has fallen to the United States.
American industries are undercut, manufacturing jobs disappear, and U.S. consumers—while enjoying cheap goods—end up financing the entire system through chronic trade deficits. Worse still, China’s trade surpluses generate massive capital inflows into U.S. financial markets, driving down interest rates and fueling asset bubbles in stocks, bonds, and real estate.
Who benefits? Chinese manufacturers and Communist Party officials, certainly. But also Wall Street financiers who transform the capital account imbalances into financial products. Who pays? American workers, American industry, and ultimately, American national security.
Traders work on the floor at the New York Stock Exchange (NYSE) on February 10, 2025, in New York City. (Spencer Platt/Getty Images)
The Free-Trade Fantasy vs. the Coase Reality
Free-market economists argue that trade imbalances should resolve themselves naturally. If China is running a surplus and the U.S. a deficit, currency exchange rates should adjust, wages should rise in China, and capital should flow to equalize global production and consumption. This is the basic logic of the Coase theorem, named after economist Ronald Coase, which holds that if transaction costs are low, markets will correct inefficiencies through voluntary bargaining.
But as Coase himself emphasized, this assumes that transaction costs and market frictions are minimal. When barriers, restrictions, or manipulations interfere with free exchange, bargaining no longer produces optimal outcomes. And that is precisely what we see in global trade. In an ideal world, Chinese workers would demand higher wages, the yuan would appreciate, and capital would flow freely to correct these imbalances. But China’s government has deliberately constructed an oppressive economic and political system that prevents this from happening.
If a factory pollutes a river, but legal and political restrictions prevent affected communities from negotiating for cleaner water, Coase would argue that the failure isn’t in the theorem, but in the existence of frictions that make bargaining impossible. Likewise, if China suppresses wages, restricts capital flows, and manipulates its currency, then voluntary market mechanisms cannot restore balance. Coase’s theorem doesn’t refute the case for tariffs—it strengthens it. If market distortions cannot be negotiated away, policy intervention is required.
Tariffs as a Gauge-Theoretic Correction
To understand the situation, it helps to turn to another framework: gauge theory, a mathematical structure first developed in physics to explain fundamental forces like electromagnetism and gravity.
Gauge theory, at its core, describes how systems maintain internal consistency when external conditions change. The concept first emerged in 1918, when mathematician Hermann Weyl attempted to apply symmetry principles to electromagnetism. The idea was refined over the following decades and became the foundation of quantum field theory. In modern physics, gauge theory explains why fundamental forces behave the way they do—why charged particles respond to electromagnetic fields, why quarks interact via the strong nuclear force, and why gravity distorts spacetime.
Gauge symmetry breaking is what gives mass to otherwise free-moving particles, distorting their behavior. The Higgs mechanism, for example, introduces a field that prevents particles from behaving as they would in a perfectly symmetric system. In global trade, China’s interventionist policies act as an economic Higgs field, introducing artificial constraints—suppressed wages, restricted capital flows, and state-managed currency valuation—that distort the natural balance of production and consumption. This forces a misallocation of global resources, much like how symmetry breaking forces particles to interact in specific ways rather than moving freely.
The essential insight of gauge theory is that forces are often necessary to correct asymmetries and restore balance. In the case of trade, China’s interventionist policies create an asymmetry—an artificial suppression of wages, consumption, and currency values that distorts global markets. If this were a physical system, we would say that China’s policies have introduced a “gauge field” that disrupts equilibrium. Tariffs function as the necessary counteracting force to restore balance.
Traditional economic models treat trade as a static equilibrium problem, but real-world systems operate in far more complex, non-equilibrium environments. Trade imbalances are not temporary deviations from balance—they are the product of deep, structural asymmetries that require active correction.
A tariff is not merely a tax. It is a compensatory field that corrects the economic distortion caused by China’s industrial policy. If China suppresses wages and floods the U.S. with cheap goods, tariffs adjust prices back to where they should be in a market that isn’t rigged. If China manipulates its currency, tariffs offset the advantage. The purpose of tariffs is not to pick winners and losers, but to neutralize the external distortions imposed by Beijing.
Trump’s Reciprocal Tariff Plan: The Logical Policy Response
President Donald Trump’s recent announcement that he will implement reciprocal tariffs—matching what other countries impose on U.S. exports—fits directly into this framework. Rather than allowing foreign nations to maintain one-sided trade barriers, Trump is proposing a policy of trade symmetry: if a country imposes tariffs, subsidies, or trade restrictions on U.S. goods, America will respond with an equal and opposite measure.
