Trump's Tariffs

Because some men aren't looking for anything logical, like money.

They can't be bought, bullied, reasoned or negotiated with.

Some men just want to watch the world burn.

Good Morning Team.

The demented orange has gone full Joker. Meanwhile, fellow menace and US Treasury Secretary Scott Bessent has told us that ‘the stock market selloff is a Mag7 problem, not a MAGA problem.’

In other words, fuck your portfolios. We don’t care.

As a reminder, Trump has effective control over the executive, legislative and judicial branches - if not totally.

For example, the Senate just voted 51-48 to block Trump’s previous tariffs on Canada, with Republicans Susan Collins of Maine, Lisa Murkowski of Alaska and both Kentucky senators, the former majority leader Mitch McConnell and Rand Paul all defying the leadership.

He could face further rebellions soon.

But this is what Trump asked ChatGPT, and what ChatGPT spat out:

It was James Surowiecki who realised that the tariff rates are actually calculated by taking the US trade deficit with each country and then dividing it by the country’s exports into the US.

Trump has then claimed that this is the ‘tariff’ charged by that country - which is patently nonsense.

But heigh-ho.

That’s what you get when you rely on AI to do your maths for you.

Moved your production out of China and into Vietnam or Cambodia? You’re shit out of luck I’m afraid. Sorry Nike. New lows beckon.

And no cashew nuts for you.

Are you a penguin? Problems arise - there’s a tariff on your island whether you share it with human beings or not.

Madagascar? I hope Americans aren’t a fan of real vanilla ice cream.

I also feel a great deal of pity for anyone managing an emerging markets ETF.

But the country which is most going to suffer from these tariffs is the USA:

Forget that the last time Trump tried out tariffs, the US markets tanked by 25%. That was child’s play.

This is an unmitigated disaster.

History lesson time.

Consider the chart above - the Smoot-Hawley Tariff Act was essentially a panic reaction, introduced in the aftermath of the Wall Street Crash, and designed to protect American manufacturers and farmers from foreign competition.

Tariffs increased on more than 20,000 goods - and was signed into law by Hoover in June 1930. Average import duties increased to 40% - but the inevitable happened next.

World powers imposed reciprocal counter-tariffs and global trade fell by 60% between 1929 and 1934. Arguably, it was also a key but little studied cause of World War II and significantly worsened the Great Depression.

Don’t take my word for it. This is agreed, recorded history.

The world gets poorer, the world fights more. Tale as old as time.

In 1934, the Reciprocal Trade Agreements Act was passed into law, allowing the President to negotiate lower tariff deals.

History rhymes right?

If only Trump could read.

The end of globalisation?

Before we get too dramatic, it’s well worth noting that Trump has the attention span of a three-year-old. Exhaustingly, we’re only on day 73 of 1,461 of his second term. There are endless, myriad ways this could all go next.

But what is clear is that the global order is being upset. It reminds me somewhat of Putin’s larger invasion of Ukraine. Analysts thought it would never happen, and then it did.

We now have chaos.

The absolute tariff rate on China now stands at 64% - not 54% or 34%. This was first spotted by Tony Sycamore at IG, who noted that there was already an average tariff rate of 10% on Chinese imports that Biden kept in place from Trump’s first go. Since taking office, Trump has also raised tariffs on China twice by 10% -meaning this latest increase is 34% on 30%.

And this is on top of the Section 301 tariffs (7.5% to 25%) and Biden’s targeted increases (including 100% on EVs and 50% on solar cells).

But even if the tariff plan ‘works,’ it doesn’t work in reality. US companies pay the tariffs. Their alternative is to manufacture in the US, but there is no certainty. You have auto executives warning it would take six years to construct the space needed - and anything can happen in six years.

There could easily be a Democrat government that rolls back tariffs in four years. Or Trump changes his mind. Or a recession comes and demand collapses. Or...

You need certainty.

But the bigger issue for the US is reciprocal tariffs. Quite how the LEDCs will react, I have no idea. I suspect many will negotiate with the US, or simply export to countries sporting a lower tariff who then export on. This will of course add costs.

The only certainty is that this is going to be both wildly inflationary and also recessionary. Whatever the markets say right now, JPOW is once again in an unenviable position.

Trump’s tariffs are going to cause inflation, which means he needs to hike rates. But they’re also going to tank growth. Which means he needs to drop rates.

That’s a bit of a catch-22.

Beyond this, the real danger for the US is what the unholy trinity of China, Japan and South Korea decide to jointly do to hit back.

Do you have any idea what kind of a wanker you have to be to unite them?

China is talking about banning investment into the USA. It could dump US Treasuries. Japan and China together are the two largest foreign holders. What happens if they decide to start selling?

But the obvious target for all three is metals. No more copper. No more titanium. No more tungsten. No more rare earths….

China already overwhelmingly dominates metals and metal processing, but if the three act together, they can effectively cripple the US economy by preventing US access to critical minerals. And the larger power has no chance of building its own capacity fast enough to deal with the fallout.

The only silver lining is that the UK has found a Brexit advantage. And Buffett was right.

Again.