Trade War 2.0: The World According to Trump
Those of you who have been following the website for some time will surely know that I love to chronicle moments of economic crises and in the financial markets, such as the situation we are currently experiencing.
And indeed he fulfilled his promise: Trump announced the new tariffs, presenting a huge list of tariffs he plans to apply, unless something changes, starting at midnight on April 5.
But let's take it step by step: what is all this about tariffs? What immediate consequences will it have on the markets? And what could happen in the long term with the global economy? Don't worry dear readers, I'll clear your doubts.
Tariffs For Everyone
Although most of our readers already know what it is about, let's quickly review what a tariff is: also known as a customs duty, it is a tax that is levied on goods from abroad when they cross the border. Therefore, every time an imported good enters the country, it pays an entry toll.
What is the main objective of implementing tariffs? Basically, to provoke an increase in the cost of the imported good in order to benefit equivalent products produced domestically.
As a curiosity, and despite the fact that the term is now more fashionable than ever, the use of tariffs goes way back, originating in the second millennium BC in Mesopotamia. However, to find written evidence we must go to the year 137 AD, when in the city of Palmyra (Syria), conquered by the Roman Empire, tariffs were applied to those merchants who intended to enter or move through said territory, which had become a major commercial center linking the East and the Mediterranean.
Subsequently, tariffs have generally been used temporarily and for strategic purposes. Let's think, for example, of situations of international conflict between major powers, where tariffs have been applied to ensure national production capacity.
However, to date no one has ever gone as far as to apply tariffs virtually to any imported product from any country in the world. And if it weren't for the fact that this is the president of the most powerful country in the world, the 'tables' that Trump showed in his press conference yesterday have an almost comic element due to their enormous size.
By the way, if you are curious to consult the complete tables, you can find them in this CNBC article.
If everything goes ahead, starting this coming Saturday, the United States will impose a base tariff of 10% on all imports, and from Wednesday the 9th, additional custom rates will apply. Among these rates, the tariffs applied to the European Union (20%), China (34%), Japan (25%), South Korea (25%), Taiwan (32%), India (26%), and Switzerland (31%) stand out for their relevance. Precisely some of these countries are those with which the U.S. has the largest deficit, as you can see in the following table:
In the list of applied tariffs, some absences also stand out:
On the one hand, Mexico and Canada do not appear because they are already subject to a 25% tariff on all products that are outside the treaty between Mexico, the United States, and Canada (NAFTA).
On the other hand, Russia, Belarus, North Korea, and Cuba do not appear either, countries that already have vetoes, sanctions, and exclusions that prevent significant trade.
What does Trump intend with these tariffs that practically imply the imposition of protectionism in the U.S.? Basically, he pursues two objectives:
The main objective of these tariffs is clearly to end the U.S. trade deficit. Curiously, the formula used to calculate the rates to be applied has been rather crude: although the White House published a nice equation with Greek letters, the truth is that what they did was simply calculate what percentage the deficit with each country represents of the total exported by the U.S., round it off, and divide it by two to be nice and have a detail (literally!). For example, in the case of the European Union:
On the other hand, the aim is to increase U.S. growth through a sort of extortion with these tariffs. Do you want to avoid paying them? Okay, then produce on U.S. soil. This theoretically will attract more businesses to the U.S., increasing employment and production.
Although paper can withstand everything, it remains to be seen whether all these measures will achieve the desired effect, or conversely lead to the ruin of the U.S. as The Economist announced today on its cover:
But let's not get ahead of ourselves: more about all this at the end of the article.
The Market Reaction
After the news broke, the markets' reaction was immediate: futures on U.S. indices plummeted more than 3% in a matter of minutes, perhaps anticipating a possible recession caused by the tariffs.
Among the values most affected by the new measure would be the values of the following sectors (in parentheses the decline in pre-opening on April 3):
The Magnificent Seven: Apple (AAPL) -7.2%, Amazon (AMZN) -6.3%, Nvidia (NVDA) -5.5%, Tesla (TSLA) -5.9%, Meta (META) -4.7%, Alphabet (GOOG) -3.0%, Microsoft (MSFT) -2.7%
Technology: Broadcom (AVGO) -6.2%, Micron (MU) -6.6%, Dell (DELL) -8.4%, HP Inc. (HPQ) -7.0%
Automotive: General Motors (GM) -2.4%, Ford (F) -2.3%, Rivian (RIVN) -5.3%, Lucid (LCID) -5.4%
Financial Sector: JPMorgan (JPM) -3.8%, Bank of America (BAC) -3.9%, Wells Fargo (WFC) -4.5%, Morgan Stanley (MS) -4.8%, Goldman Sachs (GS) -4.6%, Citigroup (C) -4.5%; crypto stocks also slide
Consumption: Walmart (WMT) -4.7%, Target (TGT) -5.5%, Nike (NKE) -9.9%, Skechers (SKX) -12%, Deckers Outdoor (DECK) -12%, On Holding (ONON) -15%, JetBlue (JBLU) -4.8%, Carnival (CCL) -6.3%, DraftKings (DKNG) -5.9%
Chinese company stocks listed in the U.S.: Alibaba (BABA) -3.1%, Baidu (BIDU) -2.9%, PDD (PDD) -5.3%, JD.com (JD) -4.6%
And what about bonds? As expected, they are skyrocketing, with the 10-year Notes rising sharply after the news, causing their yields to drop to a six-month low of 4.05%, which implies already discounting a 25 basis point rate cut. (This detail is important: Trump seems determined to outmaneuver Powell and force him to lower rates by any means to refinance American debt at more favorable rates).
Of course, the greenback could not be oblivious to all this and, although initially we saw a timid reaction, during the Asian session we saw the USD plummet by nearly 2%, which implies discounting a scenario of economic recession and interest rate cuts.
Curiously, cryptocurrencies have not managed to benefit from this dollar drop, opting to follow the trend of the Nasdaq, behaving like any other risk asset:
In short, if the initial reaction of the markets remains over time, it seems that Trump's measures could induce a regime change in the market that would imply a new financial context with stock markets and risk assets declining, bonds rising (interest rates declining), and the dollar falling sharply.
What Will Happen? What Mystery Will There Be...?
The truth is that the tariffs announced last night by the Trump administration lead us to a situation of total uncertainty for the coming months, especially if it is ultimately confirmed that these measures have come to stay (be careful, with Trump anything is possible!). And we must take into account that, by definition, the introduction of tariffs can have quite significant consequences on the economy:
They raise revenues for the country imposing them and are paid by both foreign producers and domestic consumers.
Their application reduces global production efficiency.
They are stagflationary for the world as a whole, being more deflationary for the taxed producer and more inflationary for the importer imposing the tariffs.
They cause American companies to be more protected from foreign competition in the domestic market, but in return make them less efficient. Therefore, they will likely survive if the government can maintain aggregate domestic demand by combining monetary and fiscal policy.
The problems also worsen if the other countries respond to these tariffs with reciprocal tariffs. The consequence of this measure would be one of stagflation at a global level. And to solve this problem, traditional remedies do not work too well, since:
Monetary policy becomes a double-edged sword: if we want to stimulate growth by lowering rates, we will provoke an increase in inflation; if we want to curb inflation by raising rates, we will kill the recovery of the economy and destroy jobs.
Fiscal policy does not solve the problem either: if we increase public spending or lower taxes, we stimulate aggregate demand but increase inflationary pressures; and if we raise taxes or reduce public spending to curb inflation, growth will slow down and unemployment will rise.
As we can see, there is not much room for maneuver, so the consequences can be very negative for all parties involved, as it is a loss-loss situation.
The only logically positive resolution to this situation is that China agrees to negotiate with the U.S., so that in a future meeting between Trump and Xi a trade agreement is signed that includes an appreciation of the yuan to cede part of the global trade pie to the U.S., although as of today I doubt very much that the Chinese government will yield to Trump's interests.
What we have no doubt about is that we are once again witnessing a unique moment in History, fascinating for any economist or market analyst (and be careful because at the speed events are occurring, it seems that this will be the trend in the coming years).
In any case, with all the generated volatility, it is worth remembering what Sergeant Esterhaus used to say to his boys in Hill Street Blues: be careful out there!
