Tariff Uncertainty Premium

The conventional critique of tariffs focuses on the duty rate: higher tariffs mean higher costs, passed on to consumers or absorbed by businesses. Ryan Petersen argues this framing misses the primary economic harm. The biggest cost is planning paralysis, the inability to make long-horizon supply chain investments when the policy regime itself is unstable.¹

The argument

Supply chains take real time to change: moving manufacturing from one country to another requires months of factory negotiations, capital commitments, and new logistics setup; pricing strategies have to be locked in months before goods arrive at port; and even choosing which country to source from requires confidence that a given tariff differential will actually persist. When tariff rates change rapidly, unexpectedly, or are explicitly framed as leverage rather than permanent policy, businesses cannot make the decisions needed to adapt.

The result is widespread paralysis. Companies know the old normal is gone but do not know what the new normal is, so they make no moves at all. "The number one reaction I see right now is a bit of paralysis of people not wanting to make a decision until there's more clarity, is Vietnam going to get hit with tariffs, is some other country?"¹

When goods are already on the water

The most acute case is a shipment that leaves the factory under a known duty rate, travels for three to five weeks, and arrives to find the rate has changed. The financial forecast is suddenly wrong. If the new rate hits every competitor equally, the cost passes through evenly; if competitors sourcing from a different country are unaffected, the company has been selectively disadvantaged. This creates a second-order risk: importers must price in not just the expected duty but the variance in duty, which is essentially unquantifiable when policy is explicitly treated as a bargaining chip.¹

The prescription

"My advice, nobody cares what I think about tariffs, but my advice would be: get it over with quickly so people can figure out what the new normal is and start planning."¹ The advice is not to remove tariffs; reciprocal tariffs are treated as a reasonable negotiating posture in their own right. The advice is to commit to a direction and stick to it, since businesses can adapt to a high-rate world as long as the rate is predictable.

If the underlying goal is to reshore manufacturing, tariffs alone are not sufficient: companies will not invest in billion-dollar domestic plants if they believe the tariffs might be removed through a deal within a few months. The duration signal matters as much as the rate itself. A strong currency combined with higher domestic labor costs can make reshoring uneconomical even at high tariff rates: "I didn't start a business to be a patriot," Petersen says of math that does not work regardless of the policy intent behind it.²

The leverage ambiguity problem

Tariff policy in this period is explicitly multi-purpose: one stated goal is reshoring manufacturing, which requires permanent high rates, while another is using trade leverage to negotiate unrelated deals, which requires tariffs to be removable once a deal is struck. These two goals are structurally contradictory for business planning purposes. A company deciding whether to invest a billion dollars in a domestic factory is really trying to answer whether this is a permanent policy or a negotiating chip, and official communications often leave that question deliberately ambiguous. The USMCA national security carve-out sharpens the ambiguity further: the legal mechanism for tariffing Canada and Mexico requires framing the tariff as a national security response to fentanyl rather than as trade policy, widening the gap between the stated rationale and the commercial effect and making it still harder for a business to model whether a given tariff is real or nominal.¹ Diversification hedges, moving sourcing to a free-trade partner country, are also undercut once free-trade partners get hit with tariffs of their own: "if they'll tariff Canada, they'll tariff Vietnam" becomes the working assumption, which is exactly why paralysis rather than movement is the dominant response.²

A useful contrast: permanent shocks are manageable

The Red Sea closure, after Houthi attacks began forcing container traffic around Africa, is a useful comparative case: a permanent supply shock rather than an uncertain one. It amounted to roughly a twelve percent cut in effective shipping capacity, and Flexport itself had more than double the demand it could find space for, yet the shock proved manageable because it was predictable.² Shippers adapted by routing around it, paying more, and building the new cost into their models. The contrast shows that even large permanent cost increases are manageable because they are knowable in advance; tariff uncertainty is a different problem entirely, not the level of the cost but its unpredictability.

Corroboration from other vantage points

A major bank chief executive reaches a similar conclusion from an entirely different seat, watching a broad small-business client book rather than freight customers: tariffs are treated as a genuinely small part of the overall economic relationship between countries, with the practical complaint being the same one, businesses cannot price their goods if they do not know how long a given tariff regime will last. If a business knows a tariff will end within six to twelve months, it can plan around that; without an end date, it has to price through the uncertainty indefinitely. There is also a stated tolerable level: companies had already adapted to double-digit tariff rates by the time paralysis returned, meaning paralysis tracked the return of uncertainty rather than the level of the rate itself. And a credible sunset date, once announced, appears to unfreeze investment immediately, since expectations reprice on the announcement of an end rather than waiting for the end itself to actually arrive, which implies a credible sunset date is worth more than an immediate rate reduction with no forward commitment attached.

Connections

The uncertainty-versus-level distinction generalizes beyond tariffs to any input whose regime is unpredictable, and it is a macro-scale version of a more general capital allocation problem: capital cannot be deployed into restructuring when the ground keeps shifting under the decision. It also predicts a specific dynamic in reshoring debates, that incumbent industries will not voluntarily reshore but may do so once uncertainty resolves into a permanent, known rate, the same old-guard-adopts-under-duress pattern visible in other forced transitions.