Apr.10

electoral-vote.com

Dem 47

   

GOP 53

Trump Caves

Yesterday morning commenced the first day of the full-blown trade war, with all the planned tariffs. Then, yesterday afternoon, Trump suddenly raised the tariffs on China to 125% and paused most of the others. This stuff changes minute by minute. It's hard to keep track.

The big question is: Why did he pause most of the tariffs? Our best guess is that it was due to the combination of the stock market rout and pressure from Republicans in Congress and donors, which made him weak in the knees. The even bigger question is: Is this just a(nother) pause or are all the tariffs now canceled except for China?

If Trump ends up canceling the tariffs without getting anything in return, it is hard to see how he can claim victory. Democrats will pound him for doing nothing to bring back manufacturing jobs or stop Heard Island (no people, just penguins) and Liechtenstein (small number of people, but no penguins) from victimizing the U.S. Then we are basically back to the status quo ante, with nothing gained except more expensive iPhones and other stuff made in China, as well as some amount of damage to the relationship between the U.S. and its trading partners.

Let us examine how the various players are reacting (although, again, this can change by the minute):

• Other countries: Before Trump paused all the tariffs, the European Union and China levied tariffs on $150 billion worth of American exports. The Chinese tariff is 84%, which will devastate U.S. farmers if it stands. The U.S. exports about $145 billion worth of products, largely agricultural, to China every year. The E.U. tariffs also hit agriculture. That is no accident, as both the Chinese and the Europeans know that inflicting pain on farmers also inflicts pain on a couple dozen Republican senators. Since Trump has lifted or reduced some of the other tariffs, the E.U. may also pull back soon. China is very unlikely to back down unless he does. And maybe not even then.
  
  While the Europeans are certainly worried about the EU-targeted tariffs, they are also watching the U.S.-China situation with trepidation. The Chinese economy is set up to produce vast amounts of stuff for export. If they can't sell those goods in the U.S. due to the tariffs, there is a good chance they will try to dump them in Europe at bargain prices, thus destroying many European companies. The E.U. won't tolerate that. But it hasn't formulated a plan to deal with it yet.
  
  
• Republicans: The tariffs were extremely unpopular with Republican donors, members of Congress, and even Republican podcasters. This may be the reason Trump caved. At the inauguration on Jan. 20, many billionaires were front and center. With the stock market crash, many of them lost billions or tens of billions of dollars. You might think that someone who was worth $100 billion and is now worth $80 billion would say: "I am happy to have $80 billion. That is good money." But that is not how it works. They were furious and surely told Trump what they thought about his tariffs.
  
  Then there are the Republican donors. This is not what they paid for. They paid for a big tax cut for rich people and less regulation of their businesses. They didn't sign up for market chaos. They also surely let Trump know what they thought of his plans and probably told him not to expect any donations to Republican candidates until he got rid of the tariffs.
  
  Republican senators facing reelection were also none too happy. They saw a recession coming up and they knew the voters, especially farmers hit hard and people with 401(k) plans that are collapsing, would blame them. Sen. Thom Tillis (R-NC), probably the most vulnerable Republican senator in 2026, had a little discussion with U.S. Trade Representative Jamieson Greer about the economy. Tillis said: "Whose throat do I get to choke if this proves to be wrong?" He is especially angry because North Carolina has attracted many foreign firms to do manufacturing in the state, but they are dependent on steel and other materials from China. If the tariffs on China stick, those firms are up a tree. Sen. James Lankford (R-OK) said that a company in his state had spent millions of dollars moving its parts production from China to Vietnam, and... Bam! Vietnam was also hit with a high tariff. What should the company do now? Will the tariffs come back in 90 days? Companies can't invest in this climate. Sen. John Kennedy (R-LA) said: "It's not fun. I don't like it. I like it when the market goes up."
  
  Other senators complained that the tariffs would hit retirees on fixed incomes hard and many of these voted for Trump and are angry with him as they see their 401(k)s plummet. This is not what they voted for.
  
  Even podcasters and commentators Joe Rogan, Dave Portnoy, and Ben Shapiro are angry with Trump. Rogan said that tariffs on Canada were "stupid." He also referred to deportations as "horrific." Portnoy said that he lost $20 million in stocks and crypto in the past few days. He was not happy. Surely many of his listeners have also lost $20 million in 3 days and can feel his pain. Shapiro said: "The idea that this [the tariffs] is inherently good and makes the American economy strong is wrongheaded. It's untrue. The idea that it is going to result in massive re-shoring of manufacturing is also untrue." Together these three and their ilk have large audiences who may have conveyed their thoughts to their elected officials.
  
  
• Democrats: Being the "out" party has the big disadvantage that you have no influence on policy. But it also has a huge advantage. The in-party is constantly at war with itself over what policies to carry out. The out-party has it easy. All it has to do is oppose the in-party. It is very easy to get agreement on that, even if different people attack different things the other guys are doing. That doesn't matter.
  
  

  Democrats from Rust Belt states like tariffs (but not stock market meltdowns), whereas Democrats from blue states like free trade. But even those from the Rust Belt are complaining that Trump is doing it entirely the wrong way. All of them are focusing on Trump's extremism. Even Sen. John Fetterman (D-PA), who has been cozying up to Trump, has something to say: "I'll never understand or support the constant punching our allies in the mouth."
  
  If Democrats are smart, they will attack the pause, saying: "What about bringing manufacturing jobs home? Have you forgotten about that? We haven't."
  

• Trump: On Tuesday, Trump promised new tariffs on pharmaceuticals. Is that gone now? Temporarily? Permanently? Who knows? For companies in that business, what are they supposed to do? Sit around and wait for 90 days before making any decisions on anything?
  
  One quote that had been circulating in the media is one from an anonymous White House official: "He [Trump] is at the peak of just not giving a f**k anymore." That really freaked out the markets. Is that obsolete now? Or not?
  
  
• Companies: Many companies are (still) caught in a vise, especially if they manufacture products in China or import a lot of stuff from there, because China is still subject to crushing tariffs. As one example, consider Apple's situation. It makes iPhones, iPads, and some Macs in China, which is now subject to a 125% tariff. How many iPhones will Apple sell at $2,250? Probably a lot fewer than at $1,000. For people whose 401(k) is tied up in an S&P 500 ETF, 8% of their future is tied up in Apple stock, even though they may not realize that.
  
  Apple simply cannot move its production from China. It has made massive investments in machinery, processes and people over a quarter of a century. That would take another quarter of a century to roll back. Besides, America doesn't have the manufacturing expertise to make many of the parts needed and even if it did, the price would soar. One firm, Wedbush Securities, estimated that if an iPhone could be made in the U.S. (which Apple doubts is possible), it would cost $3,500.
  
  Apple isn't the only company with a China problem. Walmart doesn't make much in China, but it buys products from thousands of Chinese companies. If all those prices more than double due to tariffs, Walmart shoppers will not be happy campers. What can Trump do? He could make some deal on paper in which China agreed to buy 10% more soybeans in return for Trump dropping the tariffs. Trump is not likely to get a much better deal because President Xi Jinping doesn't have to worry about elections next year or senators or podcasters giving him a hard time. He can just wait it out until Trump folds. And fold he will, probably with some "fake" deal to allow him to save face with low-information voters.
  
  
• Financial markets: The markets are spooked by all the tariff stuff. They dropped about 15% over 3 days, then the Dow went up nearly 3,000 points yesterday on the news that the tariffs have been paused. Here is what happened after the pause was announced:
  
  
  
  But now the bond market is going crazy. The 10-year treasury bond, which is a benchmark for a lot of debt, is in turmoil. It was under a 4% yield last week and jumped to 4.74% yesterday. This happens when the price of the bond, which is determined by the number of buy and sell orders, goes down, since the value at maturity is fixed. Treasuries' yields go up when people are dumping them (because you can buy them cheaper but the value at maturity is the same). That is a sign of nervousness. German bonds also dropped, as did gold. Investors have no idea what is next.
  
  
• Ordinary Americans: A new Reuters/Ipsos poll taken last weekend shows that 73% of Americans believe prices for "the items you buy every day" will go up in the next 6 months. There is a word for that, something like inflammable, influencer, influenza, inflatable, or something like that. It slipped our minds for the moment.
  
  In particular, 77% expect electronics to go up, 73% expect cars to go up, 72% expect appliances to go up, and 70% expect fresh produce to go up. When people expect prices to go up, they tend not to empty their bank accounts on big purchases because they know they may need the money soon. This causes consumer spending to drop. When people buy less, companies lay off workers. This often leads to a recession.
  

All in all, it is a mess and we will have to see how it plays out. If the tariffs don't come back, then the worst may have been avoided, but Democrats can then pounce on "So you aren't going to bring back manufacturing jobs like you promised? We can do that." When reporters ask "How?" they can say they will use tariffs, but very carefully targeted, along with subsidies to crucial industries. The latter was Joe Biden's approach, especially with the CHIPS Act. (V)