Apr.04

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The Trade War: Trump's Tariff Plan Is Top Secret!

We are now a couple of days into Donald Trump's latest trade war, and it is absolutely dominating the news. We pored through a vast number of stories, and picked out the 10 storylines we think are most worth noting:

• The Market Responds: Let's start our section on how the markets reacted to the trade war with some art. Here's the last 5 days for the Dow Jones:
  
  
  
  And here's the last 5 days for the NASDAQ:
  
  
  
  And here's the last 5 days for the S&P 500:
  
  
  
  Those pretty much tell the tale, although if you would like the raw numbers, the Dow Jones fell 1,679 points (4%) yesterday, the NASDAQ fell 1,050 points (6%), and the S&P fell 274 points (4.8%). This is the worst day the stock market has had since the early days of the COVID-19 pandemic, back in 2020. Incidentally, Trump was president then, too.
  
  As of 3:30 a.m. PT, Dow Jones futures suggest the market will have another bad day today. Not as bad as yesterday, mind you, more of a mini-bloodbath.
  
  
• Canada Responds: We are surprised that more nations did not announce countermeasures yesterday, since everyone knew this was coming. But Canada, at least, was (partly) ready, with PM Mark Carney announcing 25% tariffs on American-made automobiles. We presume that other nations will be making announcements soon; maybe the delay was so they could see exactly how harsh the Trump tariffs were, or maybe they are cooling their jets for a few days to see if Trump backs down (again).
  
  (Indeed, moments before we went live, China announced a 34% tariff on U.S. goods.)
  
  
• The Spin: The spin operation operated by the White House, and its friends in the media, was in full effect yesterday. Trump himself took exactly one question from reporters yesterday, and it was about how the tariffs are going. He responded:

  I think it's going very well. It was an operation, like when a when a patient gets operated on. It's a big thing. I said this would exactly be the way it is. We have six or seven trillion dollars coming into our country... the markets are going to boom.

  We must agree on one point; we often find that things are exactly the way they are.
  
  White House Press Secretary Karoline Leavitt was living in a dimension perhaps even further removed from reality than the one Trump is, and declared there "is not going to be any pain" for American workers due to the tariffs. And former White House spokesperson, and ongoing Trump sycophant, Kellyanne Conway celebrated the "positive" reaction to the tariffs coming from Stellantis (whose brands include Chrysler, Dodge, Jeep, and Ram Trucks). That positive reaction was... the company laid off 900 workers. That word that you keep saying, Kellyanne. I do not think it means what you think it means.
  
  Over at Fox, The Five co-host Jeanine Pirro celebrated the tariffs, and said "I don't really care about my 401(k)." Perhaps, and we're just spitballing here, when you have an annual salary of $3 million, like Pirro does, you don't need to worry so much about your IRAs. Fox News anchor John Roberts predicted that the stock market would skyrocket, and the Dow Jones would be above 50,000 by the end of the year. The folks at Newsmax actually rang the bell to commence trading on Wall Street yesterday, and CEO Christopher Ruddy projected an "exciting day." We suppose he was right, but probably not in the way he meant. Among the stocks hardest-hit during the exciting day yesterday was... Newsmax, which went public on Monday. The price was artificially high because it became a meme stock, but not so much anymore. The value of the stock dropped by 77% yesterday, wiping out $24 billion in value.
  
  
• Blowback: The much louder voices yesterday were the ones criticizing the tariffs. We won't bother with any Democratic politicians, since you know they aren't going to say nice things. Instead, let's talk finance experts, and maybe a Republican or two.
  
  To start, the regular staff of Fox is in the bag for Trump, but some of their contributors did not get the message, at least not on tariffs. Ben Domenech, for example, said: "Look, I hate tariffs, I think they're stupid. I think they're backwards. I don't think they help the American economy." Over at CNBC, Jon Fortt added: "And the market reaction after hours, I've never seen anything like it. This, I think, fair to say, is worse than the worst-case scenario of the tariffs that many in the market expected the president to impose." Meanwhile, Jim Cramer, who might be the most famous stock market analyst in the country, lamented:

  [T]hey screwed it up and they really made—they did it a totally ill-advised way. And I was very let down as someone who really, truly believes that free trade is awful for the American working person. This is what they came up with? Jeez, come on! Have some gumption. Have some math.

  He also added: "I feel like a sucker tonight."
  
  Meanwhile, The Economist published an absolutely blazing editorial (subscription required) which included this assessment:

  Almost everything Mr. Trump said this week—on history, economics and the technicalities of trade—was utterly deluded. His reading of history is upside down. He has long glorified the high-tariff, low-income-tax era of the late-19th century. In fact, the best scholarship shows that tariffs impeded the economy back then. He has now added the bizarre claim that lifting tariffs caused the Depression of the 1930s and that the Smoot-Hawley tariffs were too late to rescue the situation. The reality is that tariffs made the Depression much worse, just as they will harm all economies today. It was the painstaking rounds of trade talks in the subsequent 80 years that lowered tariffs and helped increase prosperity.
  
  On economics Mr. Trump's assertions are flat-out nonsense. The president says tariffs are needed to close America's trade deficit, which he sees as a transfer of wealth to foreigners. Yet as any of the president's economists could have told him, this overall deficit arises because Americans choose to save less than their country invests—and, crucially, this long-running reality has not stopped its economy from outpacing the rest of the G7 for over three decades. There is no reason why his extra tariffs should eliminate the deficit. Insisting on balanced trade with every trading partner individually is bonkers—like suggesting that Texas would be richer if it insisted on balanced trade with each of the other 49 states, or asking a company to ensure that each of its suppliers is also a customer.

  Pulling absolutely no punches, the magazine denounced Trump's trade war as "the most profound, harmful and unnecessary economic error in the modern era." Ouch.
  
  Moving on to the politicians, Mike Pence got on eX-Twitter to share his view that "The Trump Tariff Tax is the largest peacetime tax hike in U.S. history. These Tariffs are nearly 10x the size of those imposed during the Trump-Pence Administration and will cost American families over $3,500 per year." And while Pence is persona non grata in the White House these days, the trade war was also blasted by someone who is generally more than happy to tote the administration's water, namely Sen. Ted Cruz (R-TX). He said: "Tariffs are a tax on consumers and I'm not a fan of jacking up taxes on American consumers."
  
  
• In Congress: In addition to Cruz, quite a few Republican members of the Senate expressed unhappiness with the tariffs yesterday, among them Thom Tillis (NC), John Kennedy (LA), Ron Johnson (WI), Susan Collins (ME) and, perhaps most notably, Chuck Grassley (IA). Several members in both chambers are putting together legislation that would, in one way or another, clip Trump's tariff wings. That includes a bill co-sponsored by Grassley and Maria Cantwell (D-WA) that is called the Trade Review Act of 2025. If the bill is enshrined into law, presidents would have to notify Congress of an increase in tariff rates within 48 hours, and would have to explain the rationale for the increase. If Congress voted to reject the new tariffs, then they would die immediately. If Congress failed to formally approve the new tariffs, they would expire in 60 days.
  
  The bar is very high for the Trade Review Act of 2025, or any other bill aimed at Trump's trade war, to become law. Not only would it have to get through both chambers, including the generally more MAGA House, but it would also have to have enough support in both chambers to overcome the inevitable veto. It's improbable that enough Republicans are to that point, quite yet. But if the pain from the trade war wrecks the economy? It's possible. It would take around 20 Republicans in the Senate and about 80 in the House. That's a lot, but remember, Trump's #1 threat (I will unleash MAGA world on you) is considerably less effective when there are 100 different targets. If Trump was to be reversed on such a high-profile initiative, and by a Congress where his party controls both chambers, that would be a near-unprecedented rebuke of a president.
  
  
• Fuzzy Math: This part of the story is just... really bad. The White House is claiming that the tariffs are "reciprocal," which ostensibly means that the U.S. is defending itself from economic aggression on the part of other nations. But, of course, no nation has slapped giant tariffs on American goods in the last month, or year, or even decade. So what, exactly, does that mean?
  
  What it means is that the administration is interpreting trade deficits as a form of aggression, and so is using that as a basis for these so-called reciprocal tariffs. In other words, "We bought more from you than you bought from us, so we're going to punish your 'bad behavior' with a tariff."
  
  But wait, beyond this... unconventional theory of international trade, it gets worse. Although the White House presumably did not think anyone would figure it out, and although the administration initially denied it, the evidence is now abundant that tariff rates were calculated based on trade deficits. Author and economist James Surowiecki was the first to figure it out; here's his explanation:

  Just figured out where these fake tariff rates come from. They didn't actually calculate tariff rates + non-tariff barriers, as they say they did. Instead, for every country, they just took our trade deficit with that country and divided it by the country's exports to us.
  
  So we have a $17.9 billion trade deficit with Indonesia. Its exports to us are $28 billion. $17.9/$28 = 64%, which Trump claims is the tariff rate Indonesia charges us. What extraordinary nonsense this is.

  It is this fuzzy math that is the basis for Trump's claim that the U.S. is charging far lower tariff rates than any other industrialized country. After all, the 32% that will now be levied on Indonesian goods is indeed far lower than 64%.
  
  As a consequence of this approach, which has left economists around the country dumbfounded, the nation that is being hit with the highest tariff rates is... Lesotho. That is the same country that Trump mocked several weeks ago as one that nobody has ever heard of. That nation has a very small GDP, about $2 billion, of which about $235 million is realized through exports to the U.S. Being very poor, it can't afford to import very much, which means that according to the Trump formula, that nation is imposing a 100% tariff on American goods. So, its reciprocal tariff is 50%, which will be devastating if it stands. The other very-high-tariff nations, among them Cambodia, Vietnam, Madagascar and Myanmar, are also very poor.
  
  But wait, beyond this crazy math, it gets worse (perhaps). As we note above, no serious economist is going to endorse this approach to tariffs. No unserious one, either, probably. So, where did the White House come up with this formula? Well, if you put the phrase "balance bilateral trade deficits" into AI engines, the administration's approach (or some close approximation) is what you get. That is the case with ChatGPT, Gemini, Grok, and Claude. If you put the phrase into Grok, you get the EXACT formula the White House used. In other news, Grok is the AI platform owned by... Elon Musk.
  
  But wait, it still gets (a little) worse. The White House is not admitting the AI part, but it realized it was caught red-handed with the fuzzy math part. So, yesterday afternoon, a White House spokesperson presented a very impressive looking equation to the White House press corps to explain how the new tariff rates were calculated:
  
  
  
  The claim was that Surowiecki was right about total exports (x_i) and total imports (m_i), but that the calculation was also taking into account "elasticity of import demand" (ε) and "elasticity of import prices" (φ). The problem is that those two numbers are constants, and one of them is worth 4, while the other is worth ¼, so they cancel out. In other words, it's exactly as Surowiecki said, and this fancy-looking equation is just sophistry. Either the administration is stupid, or it thinks you are.
  
  
• Targeted Nations: The clown show stuff does not stop there. Among the places that will now be subject to tariffs are Heard Island and the McDonald Islands. There are no human inhabitants on Heard Island and the McDonald Islands. Together the islands are an Australian territory populated by penguins. The British Indian Ocean Territory is also on the list, despite the fact that the only people living there are residents of a joint U.S.-U.K. military base.
  
  
• Un-Targeted Nations: On the other hand, there are a few prominent nations who were spared from Trump's tariff wrath. Cuba, for example. North Korea. And, you know... Russia.
  
  When reporters asked about the exclusion of Russia, the administration claimed that sanctions had "already rendered trade between the two countries as zero." That's not actually true; the amount of trade between the U.S. and Russia is way down, but it still amounts to more than $3.5 billion per year. And remember, other targets of the tariffs not only don't have ANY trade with the U.S., they don't have any people. So, this explanation doesn't exactly pass the smell test. And certainly, the optics are not good—it's not especially wrong to say that the U.S. hit its allies with tariffs, but spared its enemies.
  
  
• What's Next? That's an easy question to answer: Nobody knows.
  
  It is plausible that, if the United States' trade deficit is deemed to be a problem, a sensible tariff policy could be an instrument in correcting that. However, if an administration launches such an initiative, there are at least three things that are essential. The first is some version of consensus or buy-in from the various stakeholders. Ideally, a president would do as much as is possible to explain to the American public what the goals are, how those goals will be reached, and when we will know that we've been successful. Perhaps even more important, however, is getting the opposition party and business interests on board, as much as is possible. The opposition party is needed because you don't want them to reverse the tariffs the next time they get power. And the business interests are needed because they have to make the long-term investments that would lead to a re-balancing of trade. If everyone suspects that a trade war is only going to last for a year or two or three, then there will be little to no substantive change, just economic upheaval.
  
  Second, and this is very related to the first item on the list, you have to actually have a plan. Is the goal to return good-paying jobs to America? To reduce the national debt? To increase the quality of goods in the United States? Something else? And how will [Tariff A] lead to [Outcome B]? Donald Trump has many words when it comes to tariffs, and he promises many miraculous results. But he's enunciated no coherent vision of exactly how this will all work. It's just tariff salad.
  
  Third, and finally, you have to go slow. Citizens are resistant to dramatic change. The markets absolutely HATE dramatic change (see above). If an administration really does want to impose protective tariffs, it should be done in stages, with a series of small changes, not one giant change. In this case, ripping the band-aid off is NOT the way to go.
  
  The Trump approach reflects absolutely none of this. No, these are Keystone Kops tariffs. Beyond the ridiculousness we outline above, like bizarro math and imposing tariffs on penguins, the White House seems to be unsure exactly what the tariff rates are, having announced two different rates for some countries. The administration can't even decide whether the tariffs are open to negotiation.
  
  As Politico's Victoria Guida puts it, nice and succinctly: "For all the detail in Trump's Wednesday announcement, his endgame is still shrouded in confusion. That's lethal for long-term investment, making confident planning all but impossible."
  
  
• We Are Not Amused One last note. Everyone knows that Trump is deeply concerned with his image and his own popularity. As coincidence would have it, Reuters/Ipsos published their latest survey of Trump's approval rating at almost exactly the same time he had his big tariff unveiling, and found it is now down to 43%, the lowest number of Trump v2.0.
  
  To say the least, it is not likely that the trade war, and the resulting turmoil, will help on that front. And that is before we talk about other drags on his popularity, like the Signal scandal. If his number drops significantly, particularly if the drop is very fast, that is almost certainly the most likely way that this trade war comes to a quick end. Otherwise, it's probably time to buckle up, because it's going to be a bumpy ride.

And there you have it, nearly 4,000 words on tariffs. Yuck. The two most damaging tariffs in U.S. history are, in some order, the Tariff of Abominations in 1828 and the Hawley-Smoot Tariff in 1930. The staff historian never dreamed there might be a third challenger for that particular "honor." (Z)