Muddy Waters warns US tariffs risks economic self-harm without broader strategy

Investing.com -- A new critique from short-selling firm Muddy Waters Research argues that while America’s economic imbalances are real, the current embrace of high tariffs without a national industrial strategy may do more harm than good. The firm likens the U.S. approach to swinging a hammer at a structural problem that needs blueprints and scaffolding.

Muddy Waters points to China’s rise as a manufacturing powerhouse, noting its success was built not on punitive trade policies alone, but on a comprehensive industrial plan. Beijing deployed targeted tax incentives, reduced red tape in special economic zones, and poured capital into infrastructure and power generation.

China’s early embrace of foreign direct investment (FDI), even in low-value-added sectors, laid the foundation for later specialization. Over time, China encouraged higher value-added industries through favorable policies and let go of low-margin businesses like textiles, which migrated to cheaper countries.

The firm argues that the U.S. has barely dipped its toe into targeted industrial support, citing the CHIPS Act as a positive but insufficient step. More must be done to support advanced manufacturing that aligns with America’s high labor costs and environmental expectations.

Muddy Waters dismisses tariffs on countries like Vietnam and Cambodia as economic theater that will only raise prices for U.S. consumers. “Are we trying to bring back sneaker and T-shirt manufacturing to Ohio?” the firm asks rhetorically. “That’s just dumb.”

The critique also targets America’s regulatory landscape, calling it a “bureautocracy” clogged with excessive permitting and paralyzing legal challenges. Muddy Waters suggests creating a specialized court system to expedite development cases, citing Texas and California as oddly effective models on opposite ends of the spectrum.

Infrastructure spending, they argue, has been driven more by political optics than practical need. Ribbon-cuttings for new projects overshadow critical repairs, while strategic investments to support supply chains remain rare and scattershot.

On education, the firm calls for a return to accountability in K-12 schools and a pivot toward vocational training. “China prioritized engineers,” the note says. “We’ve prioritized educational fads and administrative bloat.”

Energy policy receives equally blunt criticism. Muddy Waters says the U.S. should abandon costly subsidies for solar and wind and double down on natural gas and nuclear to ensure stable, scalable power for a future industrial base.

The bottom line, the firm concludes, is that tariffs in isolation are “worse than doing nothing.” Without a ten-year, multi-pronged industrial strategy, Americans may end up poorer, less competitive—and stuck with more expensive T-shirts.

This article first appeared in Investing.com