U.S. Administration Update

On April 2nd, the single biggest trade action under the new Trump Administration occurred. President Trump imposed a 10 percent baseline for all goods from every country and higher tariffs for other countries with which the U.S. has a trade deficit. The methodology for these “reciprocal tariffs” was questioned by many experts; countries with no production or exports to the U.S. were slapped with tariffs. The stock market dropped considerably, jeopardizing millions of Americans with 401(k) retirement accounts and other investments. Reactions from long-time U.S. allies were equally negative.

In response, the Trump Administration “doubled down” for days. It was not until the bond market reacted with climbing yields that President Trump “blinked” and implemented a 90-day pause. Although the minimum 10 percent on all goods continues and tariffs against China were increased to 145 percent. Yet days ago, President Trump exempted all electronics coming from China to the United States.

So, what is the Trump Administration doing? While no plan has been released, the Trump Administration has said it is trying to address several structural issues: 1) trade deficits; 2) the lack of essential domestic manufacturing production; 3) global supply chains, a.k.a. China’s supply chain; and 4) currency adjustments. Unfortunately, tariffs—especially broad-based tariffs against multiple countries—are a blunt instrument and are not designed to address these challenges.

The U.S. has had a trade deficit for many years, and it has grown dramatically in the last 25 years. The reason for the trade deficit is that the U.S. consumes more goods than it produces but exports more services than it imports, resulting in a services surplus. President Trump’s reciprocal tariffs did consider the U.S.’s favorable trade balance in services.

Ignoring the differences between goods and services, the Trump Administration is determined to change the global trade dynamic. The 10 percent baseline tariff against all countries is unlikely— on its own—to rebalance U.S. trade deficits. The reciprocal tariffs, now on pause, have caused some countries to approach the White House, although it remains unclear what the Administration is seeking. The Commerce Secretary, Director of the National Economic Council, U.S. Trade Ambassador, and Treasury Secretary have each said different things, including demanding other countries eliminate their tariffs against the U.S., reduce non-trade barriers to all U.S. goods, and eliminate regulations and laws that the U.S. does not like.

The U.S. wants to push other governments in Europe and elsewhere not only to reduce their tariffs on U.S. goods but also, and more importantly, to derisk from Chinese investment. The Trump Administration tariff policy is focused on China and expanding the rule of origin inquiry to include any Chinese investment not only in Asia, but also in Mexico and Africa. Put simply, the Administration wants to upset global supply chains that rely on Chinese investment.

The Trump Administration also is using tariffs to reshore essential production back to the United States. Perhaps the best example of this is the Trump Administration’s tariffs on auto, steel, and aluminum. President Trump is trying to use auto tariffs to drive the automobile and automotive parts industry back to the U.S. and to do the same with steel and aluminum tariffs.

The Trump Administration is also initiating 232 investigations into what it believes are critical industries for the U.S. to reshore back to domestic soil. Among those critical industries the Trump Administration will investigate are semiconductors, pharmaceuticals, copper, and other critical minerals. These investigations are an attempt to achieve the Administration’s third goal of onshoring critical industries.

There are many questions that have been raised because of the Trump Administration’s unprecedented trade actions. What will happen to the economy in the short, medium, and long term? Can the Trump Administration achieve its goals without crashing the economy. Why did President Trump pursue these policies when the U.S. economy was doing well? Why is this different from last time? Will there be exceptions for countries? Companies? What is the Trump Administration saying about prices? And what about all the uncertainty?

This is what we are hearing. First, President Trump looks back to his first-term Administration in 2017 and 2018 when he launched his three-pronged approach: reduce regulations, lower taxes, and diversify energy. After these policy objectives were implemented, he placed tariffs on China, aluminum, and steel as well as a few other products. Before the COVID-19 pandemic hit, Trump believed the result of his policies were low inflation and job growth. He does not believe that the tariffs resulted in higher prices. And he blames high prices on the Biden Administration’s economy.

This time in his second term, before implementing any policy objectives, including lowering taxes and reducing regulations, President Trump is implementing tariffs. And while some Republicans in the Senate believe achieving policy objectives should be accomplished before implementing tariffs, the Trump Administration does not believe that implementing these policies in reverse order will have a negative impact. Looking at the numbers—low consumer confidence and decreasing public support—the American people, at least currently, appear to have a different view.

Additionally, the stock market has been reacting mostly negatively both to tariffs and uncertainty. In response, the Trump Administration is asking for its policies—deregulation, energy diversity, tax relief, and tariffs—to be given time to work into the economy, acknowledging that U.S. consumers will have to suffer in the short-run. President Trump believes that the economy will adjust, that prices will not rise, deregulation is coming, energy diversity is actively happening, and the tariffs will remediate the trade imbalance, reorder global supply chains, and onshore critical industries. The Trump Administration has asked the American people to give them at least until the 4th quarter when they will start experiencing positive results.

Many economists and others have raised serious concerns about the Trump Administration’s approach. Most economists believe that tariffs will raise prices in the short and medium term. Additionally, while experts and economists agree that countries need to derisk from China, there are questions about whether tariffs are the best way to convince countries to derisk. U.S. consumers are not a patient group. They had no patience for “Bidenomics” which produced solid fundamentals, a healthy stock market, job growth, and investments in infrastructure and reshoring industries such as semi-conductors. Most observers do not see U.S. consumers being patient with a Trump Administration where the stock market falls, prices are rising, and small businesses are experiencing the brunt of uncertainty and disrupted supply chains.

The Trump Administration is betting on the importance of the U.S. market to other countries. The big question is whether access to the U.S. market is sufficient to change global supply chains and investment decisions. No one knows, and it is a big bet. President Trump’s tariffs are a shock to industrial and trade policy, and we do not know whether the shock will overwhelm the system. We also do not know whether the Trump Administration has the capacity to manage the aftershocks. Companies and countries alike will be asking for relief and will be offering “deals” to the Trump Administration. Leaving aside the unprecedented opportunity for corruption, can the Trump Administration manage the incoming offers?

At the same time, China has already imposed its retaliatory tariffs. Some of the retaliatory tariffs from the European Union were put on hold after President Trump paused the reciprocal tariffs, China and Canada have, and the European Union will, target specific exports, including agriculture commodities that would hurt U.S. farmers. Those farmers have barely recovered from the COVID-19 pandemic. Absent agreements however, it is clear that countries with the power to do so will retaliate. We know from President Trump’s first term that retaliation will have a negative impact on U.S. consumers, small businesses, and farmers.

All this is happening as the Trump Administration slashes the U.S. federal budget, limits services to the American people by cutting programs in education and health, and disengages from Ukraine and our NATO allies.

Certainly, every expert and economist could be wrong. Industries may derisk from China and move their supply chains to the U.S. or, more likely, elsewhere. Critical industries could reshore back to the U.S. and trade deficits could be reduced. Over the next few months, we will keep our eyes on the real economy, see what happens to wages, prices, and consumer confidence and whether the U.S. will head into a recession. If the U.S. lands in a recession, the only thing President Trump will have achieved is to have reduced the trade deficit. Consumers with less money and little confidence in the economy will spend less, and the U.S. trade deficit will be smaller.

For a more detailed analysis of how the U.S. government could address these challenges, I invite readers to read my former colleague, Richard Samans’ analysis here.