This Week's Tariff Talk Is More of the Same

Editors’ Note: Our political commentary is nonpartisan by design. We favor no politician or political party and assess political developments solely for their potential market or economic impact.

After a mid-autumn respite, tariff talk returned with a vengeance this week. In just two days, President Trump said he will remove Argentina’s and Brazil’s waivers from steel and aluminum tariffs, threatened a 100% tariff on select French goods, walked back said threat and warned Chinese trade talks may drag beyond next year’s election. That delay, of course, would entail the next round of tariffs taking effect on December 15, sparking much angst among investors. Yet for all the chatter, not much has changed, and we don’t think any of the latest developments are surprising. They also remain much more a political story than an economic one. We think understanding this likely helps investors remain disciplined.

Consider the political backdrop, and we don’t think Trump’s tariff talk should shock. Protectionism was one of the most consistent planks in his 2016 platform. While we don’t think tariffs are good economic policy, they seem like a political success, particularly in the Rust Belt states that swung the election his way. Election Day 2020 is now 11 months away, and the Democratic scrum to pick a challenger is sucking up most of the political sphere’s attention (with a little left over for the impeachment proceedings). After a certain three-term Gotham City mayor and multi-billionaire threw his hat in the ring 10 days ago, it seemed like a foregone conclusion the president would seek a way to get his name back in the headlines for something other than alleged high crimes and misdemeanors. Reverting to a tried-and-true campaign mantra—tariffs—was only logical.

We have always said these tariffs are about politics, not economics. One, protectionism is an easy sell with those Rust Belt voters. Two, if they were about permanent economic policy, they would probably be much bigger and more sweeping, not targeted at certain countries and goods. Such fine-tuned tariffs seem more like a tool to force trade talks with countries that otherwise wouldn’t be too keen on improving access to their own markets. The evolution of Chinese trade talks is Exhibit A. Tariffs brought them to the table to discuss issues that have long been a thorn in US businesses’ side, including forced technology transfers, limited market access and intellectual property theft. The Bush and Obama administrations also tried to fight this, with limited success. Tariffs were just a novel way to get China to the negotiating table. Now Trump appears to be doing the same with France and its digital services tax—a tax on Google, Amazon and other US giants, which the Trump administration has long argued targets American companies unfairly.^[i]

Political considerations likely also explain the rhetoric about China talks stretching beyond next November—which isn’t a new assertion. Trump is all about “winning.” Getting a China deal quickly would be a win, but an ill-timed one. Memories are short. How much mileage would “I got a deal with China several months ago” get on the campaign trail? Voters are fond of saying That was yesterday—what will you do for me tomorrow? “Vote for me so I can wrap up this China deal,” or “Vote for me because I just got this awesome China deal yesterday and can win more for you tomorrow” would probably resonate a lot more. Strategically delaying a deal for maximum campaign impact is what any politician worth their salt would do. Remember when a hot mic caught President Obama telling former Russian President Dmitry Medvedev he could go easier on Russia after winning re-election? It is perhaps unseemly, but that is just how politics works, folks.

There is probably one other variable affecting the timing of the China bluster: North Korea, which fired some missiles at the sea last week. Trump’s tough trade talk has a curious correlation with North Korean aggression. We don’t think this is mere coincidence. Trump needs China’s help with denuclearization talks. Look back at past escalations in his trade tiff with China, and you will see many of them coincide with North Korean missile tests and bombast. As North Korea quiets down or enters talks, trade rhetoric frequently cools too. This suggests to us Trump is using tariffs as a way to goad China into helping bring North Korean dictator Kim Jong-un to heel. We can’t prove any of this, as we haven’t bugged anyone’s office, but the timing is rather uncanny.

Don’t interpret any of this as meaning we are fans of tariffs—we aren’t. The freer trade is, the happier stocks generally are. However, these tariffs have been in place for over a year now, and the US, Chinese and global economies are still growing. The bull market keeps marching higher. If they were going to cause a bear market, they likely would have already. By now, their surprise power is gone, and it is becoming increasingly clear they are nowhere near large enough to knock the bull market off course. Even if we assumed all of Trump’s tariffs and other countries’ retaliation kicked in at an exaggerated 30% rate, total tariff payments would amount to just 0.4% of global GDP.^[ii] But judging from Taiwan and Vietnam’s surging trade data, which suggest companies are rerouting trade to avoid tariffs, even that figure is likely too high.

So whenever tariff talk flares, remember the bark is bigger than the bite. Remember the political considerations and the low likelihood that tariffs, in and of themselves, are the endgame—they are much likelier a means to freer trade overall, if Trump’s gambit is successful.^[iii] Between their limited scope and their likely limited shelf life, the potential for reality to exceed investors’ expectations seems quite high.