If the current tariffs drama surrounding US President Donald Trump looks nonsensical to you, congratulations — you’re still sane. But sanity alone won’t help make sense of this new wave of American economic nationalism. Because these tariffs aren’t about economic sense. They’re about narrative warfare. And the formula behind them isn’t found in trade textbooks — it’s found in campaign strategy decks, belief systems about “burden sharing,” and the unraveling of Pax Americana.

The formula isn’t economic; it’s narrative arithmetic

Let’s start with basic math. The Trump administration’s 2025 tariff plan, as The Atlantic‘s Derek Thompson put it, takes the US back to “the highest tariff duty as a share of the economy since the 1800s” — a pre-industrial throwback justified with 21st-century populism. 

The White House was caught using an AI model—built not by the Council of Economic Advisers, but by a private consulting firm—to generate the tariff schedules now making headlines. According to internal memos leaked to The Atlantic, the model ingested bilateral trade flows, elasticity estimates and a hodgepodge of political sentiment data scraped from social media to calculate “optimal pain points” for foreign exporters. In effect, tariffs were set not by economists but by a machine trained to maximize leverage in trade negotiations—prioritizing geopolitical pressure over economic efficiency. One senior official reportedly described it as “war-gaming the global economy with ChatGPT on steroids.”

Unsurprisingly, transparency was absent. No peer review, no published methodology; just a black box churning out tariff rates designed to look tough on paper while playing chicken with global supply chains.

The AI-driven tariff formula ended up slapping duties on tiny island nations with no significant exports to the US — places like Vanuatu and the Seychelles. The algorithm, designed to target trade imbalances, flagged them as “net beneficiaries” despite their having virtually no economic relevance. Among the territories hit with tariffs were the Heard Islands, a place inhabited only by penguins.

Instead of basing “reciprocal” tariffs on the rate charged by trading partners, the Trump formula is based on trade balances or parity – which has little to do with actual trade imbalances.

Ben Hunt, in his blistering Epsilon Theory piece, nails the narrative shift. He describes how the US is shifting from a coordination game — Pax Americana — to a competition game: America First.

The coordination game produced global prosperity: The US offered access to its consumer base and military protection and in return dominated the world system. But that required trust. Once the US defects and imposes tariffs unilaterally, it forces others into their own corners.

Suddenly, we’re all in a prisoner’s dilemma. In this thought experiment developed by game theorists Merrill Flood and Melvin Dresher, prisoners are presented with the opportunity to rat out their co-conspirators in exchange for going free — but if no one confesses, then none can be convicted. Mutual silence gives the best collective outcome, but individual incentives push each prisoner to defect.

International trade is similar. It works only as long as everyone agrees not to break faith with the others. The Trump administration has now decided to take the second option. And the result? Everyone defects. Everyone loses.

Passing the buck

Amid the carnage in global capital markets, both Chief Economic Advisor Stephen Miran and Treasury Secretary Scott Bessent tried to distance themselves from the tariff plans. Bessent claimed he “wasn’t involved in the calculation of the numbers,” while Miran said “the President chose to go with a formula … suggested by someone else.”

Those denials reveal the unsettling news that Trump neither consulted nor valued the input of the treasury secretary nor the chief economist.

In a speech at the Hudson Institute, Miran tried to rebrand the disastrous tariff adventure.  The “costs” of US reserve currency status posed an unfair tax on American workers. “Persistent currency distortions” caused by dollar demand, he argues, fuel trade deficits and hollow out US manufacturing. 

The idea that manufacturing decline stems from trade deficits collapses when compared to Germany. As the Peterson Institute’s Adam Posen pointed out, North Rhine-Westphalia — Germany’s industrial heartland — lost manufacturing jobs at nearly the same rate as Ohio, despite Germany running massive trade surpluses. The percentage of employees in German manufacturing was cut in half since the 1970s.

The narrative on why tariffs are necessary is constantly shifting. Early arguments ranged from “reshoring manufacturing” to “protecting domestic industry.” Later, potentially abolishing income taxes was introduced as a sweetener. More recently, “border protection” from drugs and/or illegal immigration was added. Finally, higher tariffs were supposed to “pressure other countries to lower tariffs,” and “getting countries to pay their fair share” for defense.

Yields on US Treasury bonds briefly fell as markets priced in a higher risk of recession triggered by the tariffs. For a moment, the administration floated a new rationale: that tariffs could help lower interest payments on government debt. But when bond yields rebounded, that narrative quietly vanished.

FOX News viewers were privileged to receive the cherry on top of all narratives — tariffs “could reverse the crisis in masculinity.”

What would a real solution look like?

Widely respected investor and Berkshire Hathaway CEO Warren Buffett issued a warning in Barron’s in 2003: persistent trade deficits, he wrote, were effectively a long-term sell-off of American assets to foreigners. His island parable of “Squanderville” living off debt issued to “Thriftville” was an early blueprint of today’s concern.

But unlike Miran, Buffett didn’t push for tariffs. He proposed “import certificates” — a market-based balancing mechanism that would cap imports to the dollar value of exports, creating natural incentives without starting a trade war.

Buffett’s critique was not of global trade, but of imbalance. The solution was system reform, not narrative-fueled retaliation.

Little did Warren know that the net international investment position, which measures the gap between what the US owns abroad and what it owes to foreign investors, would get ten times worse. That figure now stands at $−26 trillion, close to −100% of GDP.

Curiously, policymakers won’t even mention the most “free market” approach; if the US dollar is overvalued, let it devalue! The Federal Reserve doesn’t even need the cooperation of other central banks (like in 1985 Plaza Accord) — it can create and sell dollars in unlimited quantities.

This, of course, would damage the status of the US dollar as the world’s reserve currency — after all, what non-US central bank or investor would like to hold a decaying currency? But the US cannot have the cake and eat it.

As this revelation dawns, the US is acting like an irate chess player realizing he has maneuvered himself into a corner: flipping the board, throwing pieces, storming out of the room and leaving the other players stunned amidst the self-inflicted damage.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.