None of the tariffs that were "paused" (?) today were in any way reciprocal. Trump and Peter Navarro believe any sort of trade deficit we may have with another country means that they are "ripping us off". It is an insane contention that nobody credible believes. Fortunately, it is easy to illustrate how ridiculous it is:
You have a trade deficit with your favorite grocery store. Are you harmed by this? Is it the result of something nefarious on the store's part, or is it a natural result of the fact that they have things you want to buy but you don't have anything that the grocery store wants to buy from you?
Your employer has a trade deficit with you and every other employee of the company, because you sell your labor to it, and you don't buy anything (or much of anything from it)? Are you ripping off your employer? How could a company, especially a very large and relatively fast growing one, survive running all of these trade deficits with all of its employees year after year if they were being harmed by it?
When one looks at it like the above, it is obvious to see that the central belief that Trump and Navarro share isn't just wrong, it's preposterous.
Trump's aggressive "reciprocal" tariffs were based on the size of each individual country’s trade deficit with the US relative to its GDP. Initially the spokespeople and proxies lied and said it was the sum of direct tariffs, impermissible subsidies, and other forms of "cheating". When they were pushed on it, they revealed that it is the WH perspective that any trade deficit has to be because of those things.
I don’t know what Trump and Navarro think they are going to negotiate. It seems more like an opportunity for Trump to assert dominance and gain attention for doing so, which is a pretty typical behavior for him. Trump believes in the strong dominating the weak and takes personal affront at a deal that is truly fair to both parties because he believes the US (and by extension him) should be the clear winner.
Trump put a 46% tariff on Vietnam. Vietnam tried to negotiate by offering 0% tariffs on all American goods (the current highest rate they charge on US imports is about 15%, for certain goods under certain circumstances) and Navarro told CNBC that they rejected it because it was inadequate. He said they were targeting our trade deficit with Vietnam.
I don’t think Trump or Navarro really understand many of the implications of the policy they are pursuing. Success would mean nations that export to the US would receive lower US dollar receipts and their central banks and corporate treasuries would have lower demand for US assets (real and financial). This reverses the capital flows that have increased the valuation of our equities and reduced borrowing costs for the government and private sector by pushing bond yields down. Bad news for stock and bond prices.
The US is very important to world trade, but we still only represent 15% of it. Pursuing trade isolationism will only result in the rest of the world continuing on with a system that they like and that works well. The re-ordering of global trading relationships around the US will take time and will result in slower growth, but with inflationary frictions.
This entire episode, including today's pause, is underscoring for the rest of the world how unpredictable and unstable US trade and economic policy is. This is a very bad thing, especially when coupled with how belligerent the Trump Administration has been towards Canada, Greenland/Denmark, Mexico, and Panama and how it is clear that the institutional infrastructure and the rule of law within the US is eroding. These things matter to foreign investors. US Treasury Bonds and the US Dollar are seen as global safe haven assets and we enjoy a ton of benefits as a society because of that. The rest of the world losing faith in that would be a very bad thing. It is already eroding but may be correctable. At some point it could get beyond salvaging.
Trump claims that his tariffs would be good for the economy in the long run, as they would result in factories getting built in the US and bring back manufacturing jobs. But Trump’s approach literally can’t work.
Building significant new manufacturing capacity in the US is a major investment commitment that will take several years and tens and hundreds of billions of dollars. The number one enemy of investments like that is policy uncertainty. Trump increases policy uncertainty every time he picks up his phone and posts something on Truth Social, let alone all the policy stop-starts and reversals he has engaged in during both his first term and his first 80 days of this term.
All of the tariffs Trump has announced will make building modern factories in the US more expense. Steel prices in the US are far higher than the rest of the world because of Trump's tariff on all steel imports, for instance. Industrial robots and other automation equipment is purchased from Japanese and European companies, as well as US providers. Tariffing those trading partners makes the return on investing in an automated factory lower.
The spasms in the capital markets that Trump has both caused and claimed not to care about are a major problem. This will increase their risk aversion for investors, corporations, and lenders alike. High Yield spreads widened by 100 basis points between “Liberation Day” and yesterday. I expect them to come back in a bit, but I can’t imagine they won’t remain somewhat elevated. That increases financing costs.
Manufacturing in the US is very different from manufacturing in China, Vietnam, and Bangladesh. The US will not be cost competitive and nobody will want most of the kinds of jobs that might be created by trying to revive the large-scale textile industry in this country. Manufacturing companies here are already struggling to fill open positions, per a Bloomberg article I just saw the other day. There were 482,000 manufacturing job openings in February, per the Bureau of Labor Statistics.
One also wonders about Trump's commitment to actually bringing manufacturing back to the US when you consider how negatively he regards the both the manufacturing incentives in the IRA and the CHIPS Act. Before those two pieces of legislation, annual investment into building manufacturing facilities in the US was running at a rate of about $68B and had averaged something around that number for the previous decade. It has rapidly scaled up and is now running at a $149B annualized rate. If he is for more manufacturing jobs, how can he be against those programs?
Trump's particularly aggressive approach toward China will not work. They are not "ready to negotiate". The Chinese think long term and could not countenance losing face over something so insulting and one-sided. China slapped proportionate retaliatory tariffs on us without blinking. They are moving to devalue the yuan daily, which makes their products cheaper for foreign buyers. They used surplus government investment funds to buy shares in publicly traded state-owned enterprises, technology firms, and ETFs starting the other day. Just today I saw this headline:
CHINA'S TOP LEADERS TO HOLD A MEETING AS SOON AS WEDNESDAY TO DISCUSS MEASURES TO BOOST ECONOMY AFTER US TRADE TARIFFS, SAY SOURCES
They are not about to capitulate at all, they are taking battle stations and they are doing so gladly because they know it will benefit them in the long run because they want to see an end to US global dominance.
The past 80 years of US global hegemony that we have enjoyed (and abused) has been built on three pillars:
(1) our military might,
(2) our use of soft power and our alliances, and, most critically
(3) global confidence in our economic and political system.
Number one is certainly still intact, but number two has been utterly shredded in less than three months. But the third one is the most important. My fear is that even reversing or negotiating down these tariffs could not repair it, without a total repudiation of Trump and MAGA. The world correctly sees our government as reckless and its leader as ignorant, impulsive, and belligerent.
Remember, Trump capitulates regularly but also often revisits bad ideas.
Burning his hand badly on the hot stove will deter him temporarily, but he will absolutely go back to touch it again to prove it never really burned him.
I doubt this particular version of this specific nightmare is over. History says it’s only going to get dumber.