The Art Of Trump’s Trade Deal

Stocks rallied for a third day in a row after testing the correction low in the S&P 500 on Monday morning. We are going to retest that low this morning for a second time, and my hope is that it holds once investors recognize the art of President Trump’s newly proposed deal on trade. Unfortunately, what investors are trading is one uncertainty for another in a grand experiment to reshape the global economy. While the actual policy is no longer uncertain, how long it stays in place and what it ultimately looks like remains to be seen. In after-hours trading, stocks briefly soared when the president announced that our trading partners would face a reciprocal tariff rate that is half of what they charge us, with a 10% minimum. That was far more reasonable and less punitive than the 20% tariff feared, which was viewed as a worst-case scenario. Then an explanation of what reciprocal means was provided, and stock market futures plunged.

According to the president, the reciprocal rate considers not just the tariff foreign countries charge but also includes the Trump administration’s calculation of currency manipulation and other non-monetary barriers. That is how they arrived at a 34% rate on imports from China, and a 46% rate on imports from Vietnam, among 183 other countries, but these percentages look more like an arbitrary back-of-the-napkin calculation in order to arrive at a specific amount of tax revenue. This is obviously far more Draconian than anyone could have imagined, and if implemented and permanent through the end of this year, would surely hurl the US economy into a consumer-led recession. This is why I think the president’s proposal is a more aggressive negotiating tactic to force concessions, but the art of his approach risks further damaging sentiment and testing the patience of consumers who are already anxiety-struck about higher prices. These new deals need to happen quickly before the weight of these tariffs impacts economic activity.

Early estimates on Wall Street indicate the average tariff rate on more than $3 trillion of imported goods will be in a range of 22-29%. It would be the highest tariff rate in more than 100 years, exceeding the 20% rate implemented after the Smoot-Hawley Tariff Act of 1930, which was an abysmal failure. It would be the largest tax increase in history and raise more than $600 billion on an annualized basis from the pockets of US businesses and consumers, which is clearly untenable. Not to mention the impact retaliatory measures by our trading partners would have on our exports, including the outright boycott of goods. It would also completely negate the benefits of promised tax cuts later this year. This is why I see it as an extremely aggressive negotiating tactic because the policy is not economically viable for any meaningful length of time.

Lower- and middle-income consumers would be hit the hardest under this trade policy because tariffs are a regressive consumption tax in that lower-income households spend a larger percentage of their income on goods and services. This would adversely impact a large swath of the president’s base. The Yale Budget Lab estimates a 20% duty on all imports would cost the average household between $3,400 and $4,200 a year in lost buying power from price increases. The Tax Foundation says the amount would be closer to $2,000. Regardless, no pundits see prices falling, and consumers were expecting an end to inflation and not its resurgence. This is one reason I do not think this policy, as proposed, can be sustained for very long.

The second reason is that we don’t have the manpower or the infrastructure to implement it. Consider that when President Trump doubled the tariff on Chinese imports from 10% to 20% and suspended the de minimis provision that allowed packages worth less than $800 to enter the US tariff-free in early February, the customs department imploded. Approximately 80% of the nearly four million packages that are imported from China each day are valued at less than $800. Customs and Border Protection is not capable of handling this volume, which is why the Trump administration delayed the suspension days after implementing the new tariff rate. Experts contend that it would take at least a year to set up a system to account for this volume.

Once again, the Trump administration’s new tariff regime ends the de minimis provision. How are customs officials going to suddenly process this volume on top of new and varied tax rates on more than $3 trillion in goods from 185 countries? If it happens at all, it won’t happen any time soon. Most importantly, this suggests consumers and businesses won’t see the full impact of these price increases for months.

For these two reasons, I don’t think the Trump administration’s new tariff policy will remain in place for very long. I give it 30–60 days before rates are reduced or rescinded under the auspices of concessions or better trade deals. Furthermore, the financial markets are clearly not going to cooperate with the president. A strong dollar was supposed to be an offset to the headwinds of protectionism. Instead, the dollar is plunging. Treasury Secretary Scott Bessent asserted that if we have good policies, the stock market will outperform. On the contrary, the US is one of the worst-performing markets in the world this year.

The good news, if any can be found, is that the real economy is still performing in line with the soft landing scenario I expected at the beginning of this year. Despite the tariff turmoil, hiring in the private sector remained robust in March with ADP reporting that the economy added 155,000 jobs, which was a meaningful increase from the 84,000 in February. This doesn’t surprise me because the service sector survey from S&P Global showed a sharp increase in business activity in March. Consumer spending is clearly a lot stronger than sentiment surveys suggest, and spending is what leads to job growth.

The one caveat is that if today’s downdraft in stock prices is the beginning of a more meaningful decline than the correction we just had, it can lead to a negative wealth effect. A deeper and more prolonged drawdown in markets is likely to slow the rate of consumer spending growth beyond what should be expected during a mid-cycle slowdown. We have not seen that yet. If we can successfully retest Monday’s low and find some firmer ground in the days ahead, that should help sentiment. Again, this is a market event and not yet an economic one, but the president is going to have to move quickly to keep that from happening.