The world now awaits Trump Shock III, but it does not quite understand his Liberation Day imposition of tariffs on the world followed by a 90-day pause a week later. This combination is described as Trump killing free trade and then backing down, blinking, climbing down, doing a U-turn, and so on.
I surmise these criticisms are from people who have never negotiated anything. Trump’s reputation is that of a master negotiator. He is demonstrating how he is just that on the world stage. Trump is negotiating multiple issues on a worldwide scale. He is like a man playing a dozen chess games simultaneously.
First, he had the Liberation Day show with the demonstration board displaying tariffs proposed for imports from all other countries. These proposed tariffs were described as “reciprocity tariffs,” but they were not based on the other countries’ tariffs. They were determined by a strange calculation based on the imbalance of trade with that country and a 10% minimum “baseline” tariff. The calculation and the presentation made it clear those proposed tariffs were unreasonable and we know it, but they would be imposed if the subject countries did not show up to negotiate new terms for trade.
Show up they did. About 75 countries were ready to negotiate by the following week. So tariffs were paused. This let those countries know that their chess games are on a friendly basis, that we are not planning to have a trade war.
Trump’s message to these countries makes three points:
- We would like to remain friends and allies with you, but we need a new, friendly, and fair basis for our relationship.
- The 90 days is to let you know we need to do it soon; we cannot negotiate these relationships at bureaucratic speed.
- Therefore, the principal decision-maker must show up to work things out - quickly.
The 90 days can be extended as needed but it is urgent we establish clarity so the stock, bond, and capital markets do not go out of whack. Reportedly, the number of countries who wish to negotiate new trade relationships is now over a hundred.
The so-called globalization system of trade and various free-trade agreements turned out to be a sham. This writer was surprised to learn that with a North American supposedly-free-trade agreement in place, Canada charges 200% tariffs on U.S. dairy products. Other tariffs and restrictive rules are in place as well, by both Canada and Mexico – to say nothing of Mexico and Canada not cooperating much on closing the borders between us to unlawful immigration.
Trump’s shock therapy made it clear to trading partners that the U.S. is serious about establishing new terms for trade. Trump is accused of abandoning the 80-year-old “rules-based order” the U.S. created and leading and starting a trade war. Not true.
Trump is not trying to burn the house down, but he is trying to remodel and update it – and quickly because we are still living in it. Trump’s pause makes it clear these negotiations are not in a spirit of animosity. The objective is to establish a new, fair, and equitable basis for stronger alliances and friendly relationships.
Many economists are criticizing the idea of imposing tariffs. These objections do not consider the tariffs already being imposed by many countries on imports from the U.S. They cite the high blanket tariffs of the 1930s as causing, or at least exacerbating, the Great Depression. Those were blanket tariffs and not the results of negotiations with each country as contemplated in the new proposals. The new proposed tariffs can be avoided by reducing the tariffs charged on U.S. imports to a specific country and also by manufacturing products in the U.S.
It will be interesting to see how this all plays out. Will the EU negotiate on behalf of all its 27 members? Ursula already announced an EU “zero-zero” tariff offer on industrial products. Maybe they can make it work, but Brussels bureaucrats are not known for expeditious results. This writer finds it difficult to believe Georgia will accept Ursula negotiating the terms of Italian exports to the U.S. Likewise, as Germany re-arms, will it accept EU and Euro-block regulation and constraints on its trade terms and financing?
Discussions and negotiations are also proceeding with Russia, Iran, and China; these chess games are not so friendly. Trump hoped he could get Putin to the table to negotiate a ceasefire for the war in Ukraine and a new working commercial relationship. So far, Putin has not showed up for that. Negotiations with Iran are problematic. Further action against the Houthis may be necessary and military action against Iranian oil and nuclear facilities may be needed to neutralize Iran as a threat.
Trump imposed extreme high tariffs on Chinese imports and further prohibited Chinese activities. China will retaliate. It has already imposed an embargo on exports of rare earths and is prohibiting import of many American products. The purchase of 43 ports, including the two ports at each end of the Panama Canal by Blackrock, was a highly effective move in an increasingly confrontational chess game with China. Rumor has it Xi was furious over this. The U.S. can expect China to take other aggressive economic actions.
The U.S. and China are entering a period of economic warfare. Economic warfare is better than actual warfare, but it has major repercussions. China is a large holder of U.S. Treasury bonds. The U.S. should expect and make plans to counter potential Chinese manipulation of the bond market by dumping bonds into the market to collapse the price and increase U.S. interest rates.
Trump is giving a Master Class on negotiating. He is demonstrating he has the necessary mental agility to respond quickly and effectively to responses and actions of other parties and changing circumstances. In addition, he has the nimble mentality to maintain several different negotiations concurrently – chaotic as that may be.