Unmark your calendar

T-day

It is hard to keep track of all the twists and turns since Trade War^2 started in January. Moreover, the erratic news flow has continued unabated in the run-up to “T-Day”—the announcement of “reciprocal” and other tariffs on April 2nd.  A New York Times piece listed 22 major trade news stories between January 20th and March 13th. Since then there have been tariff threats for autos, lumber, chips and pharmaceuticals, as well as tariffs on anyone who buys Venezuelan oil or gas. The later includes, the US, Mexico, China, Spain, Brazil and Turkiye.  No doubt I have missed something here.

To me the unabated news flow underscores that T-day is not really that important. I would be amazed if there was greater clarity on the tariff outlook coming out of the announcements that day. Why would investors, businesses and consumers believe that this is “the” new regime and now we can adapt to it?

Suppose the new tariffs are on the soft side. Does this mean the trade war is winding down or is this just the flip side of the flop? Will any positive market response turn off the “Trump put,” making more tariffs likely? Will these tariffs accomplished what they are supposed to do, driving down the deficit? How will the Administration act if the trade deficit remains very high? I would expect a one-day relief rally on a "soft" announcement.

Reading the fine print 

I also think it is important to look carefully at the supposed softening of the trade rhetoric. The market was relieved to learn that the reciprocal tariffs will be a single “number” for each country rather than targeting individual items. The markets also rallied on a WSJ piece arguing that “he Trump administration is focusing on applying tariffs to about 15% of nations with persistent trade imbalances with the U.S.—a so-called “dirty 15,” as Treasury Secretary Scott Bessent put it last week.” (Chart) This means that many countries will be unaffected.

I wouldn’t take too much comfort from the supposed softening of the trade rhetoric. The “dirty 15” includes virtually all of our major trading partners and together they make up about 82% of our exports and imports. The reason they simplified the list—making it shorter and not targeting individual products—is because of logistical challenges, not because they want to go easy on tariffs. I’m confident that this list will be revisited sooner rather than later.

Trade War 101

In tracking the trade war I fall back on several guiding principles.

First and foremost Trump and his advisors are mercantilists. They think the US is getting ripped off in trade and its wealth is being stollen. Eliminating the trade deficit will usher in a golden age. Any pain in the short term is worth it for the long-run gain.

Second, unlike in Trade War 1.0, there are no voices in the Administration pushing back against tariffs and there are many enthusiastically pushing for more. The same is generally true within the Republican Party and in much of the business community. As the saying goes: if you don’t have anything good to say, say nothing at all.

Third, no deal is final. If the first battle doesn’t deliver all you want, try again. The best example, of this is the fact that the USMCA trade deal has not prevented Mexico and Canada from being the main targets in Trade War^2.

Fourth, creating uncertainty is a “feature, not a bug.” It puts your negotiating partner off balance and forces American businesses to seek exemptions.

Fifth, the pain thresholds for the “Trump put” are high. Trump’s approval rating was unusually high coming into his second term and the stock market was buoyed by hopes of tax cuts and deregulation. In addition, the economy was in good shape coming into the new year. This, plus blaming Biden, provides a cushion against criticism.