Early Signs of Trouble: Feedback Loops Might Explain Why Reshoring via Tariffs May Backfire

 

Overview

This article analyzes the President’s strategy of using tariffs to promote domestic manufacturing reshoring. Employing Jay Forrester’s System Dynamics framework, it argues that this approach, embedded within the complex global trade system, is likely to generate counterproductive feedback loops and unintended consequences, ultimately undermining its objectives. The analysis incorporates critiques from diverse sources, including investor Bill Ackman questioning policy motivations, Elon Musk advocating for free trade, and risk analyst Nassim Taleb highlighting the critical conflict between the need for long-term investment certainty and the perceived transience of the tariff policy. Further evidence from financial institutions (Morgan Stanley, J.P. Morgan), concerned investors, and industry executives reveals widespread skepticism that hinders the capital commitment necessary for reshoring. Potential global repercussions, such as retaliatory tariffs and strained alliances, coupled with practical hurdles like inflation pass-through and infrastructure gaps, suggest the tariff strategy risks economic instability and may fail to bring significant production back to the U.S., potentially pushing it further offshore. Furthermore, an article by the Wall Street Journal argues that the application of more widespread trade barriers by the U.S. could help drive even more nearshoring to Mexico.

The Tariff Challenge: How America’s Reshoring Strategy Might Unravel

Global trade is a tightly woven web of interdependencies. Against this background, the President has pursued a strategy of using tariffs intended to reshore manufacturing and production. This strategy, advocated by the President and his trade advisors, posits that substantial duties on foreign goods will increase tax revenue and encourage companies to relocate operations back to the US, ideally producing or growing “everything” America consumes domestically only within the 50 states(WSJ). The goal is to enhance job opportunities and strengthen economic resilience through permanent industrial shifts. However, conflicting signals, including suggestions that tariffs might serve as temporary negotiating tools, introduce immediate uncertainty—a core challenge explored in this analysis. If tariffs are perceived as transient, the likelihood of significant reshoring diminishes considerably.

Drawing from the insights of systems theorist Jay Forrester (MIT) -for analysis purposes—amplified by real-time economic debates, and sharpened by critiques from diverse corners—including the President’s supporters and financial heavyweights—it appears increasingly plausible that this strategy could trigger a cascade of unintended consequences, failing to achieve its primary reshoring objective.

The Feedback Loops of a Complex System

Jay Forrester, the System Dynamics (MIT) pioneer, taught us that complex systems—like global trade—are governed by feedback loops. These loops are cycles of influence where one action ripples through a system, only to reevaluate and affect the starting point in ways that either stabilize or destabilize the whole. Forrester emphasized that cause and effect in such systems are rarely immediate or localized. Instead, they’re often delayed and distant, making outcomes unpredictable and counterintuitive when looking only at the first-order effect.

Tariffs fit firmly into this framework. They don’t operate in a vacuum but within a complex global trade ecosystem, where supply chains, pricing, and geopolitics are deeply interconnected. Imposing tariffs might seem straightforward—penalizing imports and driving reshoring—but the feedback loops they trigger can tell a different story—one of rising costs, strained alliances, and economic blowback.

Early Signs of Trouble

These theoretical risks are mirrored in emerging real-world concerns. The tariffs, a cornerstone of the reshoring agenda, are already sending tremors through the system, exemplifying the complex feedback loops Forrester described.

Bill Ackman, an investor and Trump supporter during the 2024 campaign, sparked debate on April 6, 2025, when he critiqued Howard Lutnick, the President’s pick for Secretary of Commerce. Ackman pointed to Lutnick’s firm, Cantor Fitzgerald, which holds a long position in bond investments that thrive in economic downturns. Ackman’s accusation is sharp: Lutnick’s tariff-heavy advice to the President might be less about reshoring jobs and more about strengthening his firm’s bottom line. If tariffs tank the economy, bond yields drop, and Cantor profits. This clash underscores a growing unease among even Trump’s allies—that the tariff strategy might serve narrow financial interests rather than the broader goal of reshoring.

Meanwhile, Elon Musk has publicly broken ranks. Speaking virtually at an event in Italy, Musk advocated for a “zero-tariff” free-trade zone between the US and Europe, arguing it would supercharge economic growth. On X, he swiped at Peter Navarro, a key architect of Trump’s tariff policies, mocking his Harvard PhD in economics as a liability rather than an asset. Musk’s dissent highlights a rift within the President’s inner circle. It signals that even ardent supporters see tariffs as a shaky path to reshoring.

The Taleb Critique: A Question of Permanence

Escalating the situation further, Nassim Taleb, the Black Swan's risk philosopher and author, weighed in on X on April 5, 2025. Taleb argues that the tariff strategy assumes companies will adapt by reshoring production. This process hinges on believing the tariffs are permanent. “Even if we ignore the immediate impoverishment from decline in trade, the clumsiness in the abruptness,” he wrote, “the problem is everyone with a functioning brain (including people on the traditional ‘right’) by now realize that Trump is a bit deranged, erratic, & these moves are likely to be transitory.” Taleb points to Trump’s age—78 and the actuarial reality: a four-year mortality risk exceeding 20%. “He could be booted out,” Taleb notes, but the political cycle doesn’t align with the timelines of heavy investment.

Taleb’s observation cuts deep, highlighting a critical feedback loop where policy uncertainty directly stifles the long-term investment the policy aims to generate. Reshoring industries—building factories or retooling supply chains—takes five years or more, longer than a presidential term, and often requires initial imports of machinery and materials. The lag is even pronounced for some sectors: “Huge capital commitments require a bit of certainty,” Taleb warns. Trump’s erratic leadership offers anything but. If businesses doubt the tariffs will last, they won’t reshore—they’ll hunker down or pivot to other countries, leaving the vision unrealized.

Investors and Banks Sound the Alarm

Doubts aren’t limited to theorists or defecting allies—the President’s investor base and the financial sector are also raising red flags. Posts on X from supporters reflect growing frustration. For example, some users noted on March 31, 2025, that the President’s mercurial changes on the specifics are likely to make investors unwilling to put money into reshoring, seeing tariffs as a bad dream that will be gone in 2–4 years.

That sentiment echoes Taleb’s point: if tariffs are perceived as temporary, the capital won’t flow to bring production home.

Banks and investment firms, meanwhile, are bracing for broader fallout. Morgan Stanley’s Global Investment Office warned in a March 11, 2025, report that “if tariffs are robust and long-lasting, defensive stocks in sectors such as health care and utilities may outperform cyclicals,” signaling a shift away from growth-oriented investments tied to reshoring. The firm highlighted that sectors like technology and materials, with high foreign revenue exposure, are “especially vulnerable” to tariff risks—a caution that aligns with Forrester’s delayed feedback loops. Similarly, on February 2, 2025, J.P. Morgan analysts noted that “the lack of clarity is causing investors to unwind equities positions,” with prolonged uncertainty potentially freezing corporate capital spending needed for reshoring.

Even industries Trump aims to bring back are skeptical. A post on X from @DrEricDing on March 27, 2025, caught the dismay of oil company executives: “I have never felt more uncertainty about our business in my entire 40-plus year career,” one said, citing immediate price hikes from US tubular manufacturers anticipating steel tariffs. This suggests that rather than spurring a return of production, tariffs are driving short-term profiteering—hardly the recipe for sustained reshoring.

The Global Ripple Effect The White House phone hasn’t stopped ringing since last Wednesday, with over 50 countries reaching out to discuss trade, according to Kevin Hassett, the President’s top economic advisor, in an ABC News interview. This flurry of calls isn’t a sign of triumph—it’s a red flag. Allies and adversaries alike are scrambling to adjust to the tariff regime, and their responses could amplify the feedback loops Forrester warned about. For instance, retaliatory tariffs from trading partners could hammer American exports—think soybeans or tech—while driving up costs for consumers at home, undermining the economic stability needed for reshoring.

Historical parallels offer a cautionary tale. The Smoot-Hawley Tariff Act of 1930, designed to protect US industries during the Great Depression, backfired spectacularly. Trading partners retaliated, global trade plummeted, and the economic downturn deepened. Today’s tariffs, while potentially less sweeping, operate in a far more interconnected world, where a single disruption, like higher steel prices, can cascade through industries from automotive to construction, raising costs and thwarting reshoring efforts.

The Hidden Costs of Reshoring

The promise of reshoring rests on a shaky assumption: that tariffs will force companies to relocate production to the US. But feedback loops—and the skepticism of investors and banks—reveal a more complex reality. Higher import costs might push firms to source domestically, but only if US suppliers can scale up quickly and affordably—a tall order given labor shortages and regulatory hurdles. More likely, companies will pass costs onto consumers, fueling inflation, or shift production to other low-cost countries like Vietnam or Mexico, bypassing the US entirely.

Consider the semiconductor industry, a prime target for reshoring. Tariffs on Chinese components might aim to bring chip manufacturing back to the US, but the country lacks the skilled workforce and infrastructure to compete overnight. Meanwhile, firms like TSMC are expanding in Taiwan and Japan, where costs and expertise align. The result? A delayed, distant feedback loop where tariffs weaken American competitiveness rather than drive reshoring.

Mexico gains Edge as Trump’s Tariffs Target China and Vietnam

Main Argument

President Trump’s latest round of tariffs, targeting global competitors like China and Vietnam while largely sparing Mexico, has unexpectedly positioned Mexico as a more competitive hub for manufacturing and trade with the U.S. This tariff advantage could accelerate the process of “nearshoring”—shifting production closer to the U.S.—potentially benefiting Mexico more than during Trump’s first term. However, challenges like economic downturns and policy uncertainty remain.

Supporting Points

• Tariff Disparity Enhances Mexico’s Position

Mexico was exempted from the high tariffs imposed on China (34% additional levy, with threats of 50% more) and Vietnam (46%), which were set to begin on Wednesday. While Mexico faces some tariffs (e.g., 25% on steel, aluminum, and non-U.S. car content), most of its trade with the U.S. remains tariff-free under the U.S.-Mexico-Canada Agreement (USMCA).

Jorge González Henrichsen of the Nearshore Company notes that this makes Mexico more competitive compared to other low-cost exporters hit harder by tariffs.

• USMCA Fuels Mexico’s Trade Advantage

Under the USMCA, signed by Trump in 2018, Mexico became the top foreign supplier of goods to the U.S., with its share of U.S. imports rising to 15.5% in 2024 from 13.6% in 2018, while China’s fell from 21.2% to 13.4%.

Mexico’s strengths—low labor costs, a skilled workforce, cultural ties, proximity, and tariff-free status—position it as a prime nearshoring destination, per Greg Husisian of Foley & Lardner.

• Potential for Increased Nearshoring

Trump’s broader trade barriers could drive more companies to relocate production to Mexico than during his first term’s narrower China trade war, which saw limited reshoring.

Martín Castellano of the Institute of International Finance highlights Mexico’s geographic and supply-chain advantages over Vietnam, suggesting it could reduce North America’s reliance on Chinese imports.

• Economic and Policy Challenges

Goldman Sachs economist Alberto Ramos estimates Mexico’s overall tariff rate at 8%, a manageable hit but not ideal. Due to policy uncertainty, the tariff edge may not fully offset Mexico’s current economic slowdown or stalled investments.

Some firms, like Stellantis and EnerSys, are pausing or shifting production away from Mexico, indicating that tariff benefits alone may not guarantee success.

• Strategic Diplomacy Pays Off

Mexico’s nonconfrontational stance under President Claudia Sheinbaum has kept tariff escalation at bay, maintaining a constructive U.S. relationship. Kenneth Smith-Ramos credits this diplomacy for Mexico’s exclusion from the harshest tariffs.

Sheinbaum aims to negotiate reductions in tariffs on cars, steel, and aluminum, which are critical for Mexico’s auto sector. This sector employs nearly two million and accounts for a third of manufactured exports.

• Adaptation and Auto Sector Risks

Economists and consultants like Alberto Villarreal note that most Mexican exporters can adapt to USMCA compliance, potentially boosting regional manufacturing. However, Michael House warns that automakers, with their integrated North American supply chains, may adjust in ways that don’t always favor Mexico.

The article from WSJ, illustrated by the points above, argues that Trump’s tariff strategy, while punishing rivals like China and Vietnam, inadvertently gives Mexico a competitive advantage in attracting nearshoring. Supporting arguments highlight Mexico’s trade benefits from the USMCA, potential for increased manufacturing relocation, and diplomatic finesse, tempered by economic uncertainties and sector-specific risks, particularly in the automotive industry.

A System on the Edge

Forrester’s insight—that systems often behave counterintuitively—looms large. The chorus of critiques from figures like Ackman, Musk, and Taleb, alongside warnings from the financial sector and industry, adds urgency to this perspective. Tariffs might yield fleeting, visible wins—a factory announcement or a positive headline. However, the complex, delayed feedback loops—where currency devaluation counteracts tariffs—could trigger grim long-term effects: eroded trade relationships, persistent inflation, and an economy strained by misaligned incentives and pervasive uncertainty. This debate highlights a system under pressure from its own intricate interdependencies.

The lesson from System Dynamics is potent: simplistic interventions in complex systems rarely deliver intended results predictably. While tariffs aim to reshore prosperity, the analysis suggests they could inadvertently push it further away, leaving the US economy to grapple with the fallout. As the feedback loops manifest—echoed by the doubts permeating financial markets and investment decisions—the critical question becomes not if the strategy will encounter significant headwinds, but how severe the unintended consequences will be.

Irving A. Jiménez