April 2025
IN THIS ISSUE
No cellphones at the Masters
That’s not how Boards work
The Dollar - watch this space
Trump’s political rhetoric meets reality
Donald Trump notoriously peddles in misinformation. That approach has clearly worked in winning Presidential elections! But now comes economic realities that Likely will not respond so favorably.
Markets (stock markets and prediction markets) let people put their money where their mouth is. Where rhetoric meets the road. Trump has spoken about eliminating the IRS, eliminating sales tax on domestic products, and funding the government with “beautiful tariffs” that are “paid by other countries”. Well, Trump is making some very stiff assumptions about how economics works. So let’s dig into April’s market convulsions in response to President Trump’s tariff policies.
The Trump Administration’s “Liberation Day” consisted of President Trump announcing wide-ranging tariffs on 60 countries, the “worst offenders” (Commerce Secretary Lutnick), to ensure that “countries can’t take advantage of us anymore” (Vice President Vance). Trump said:
“For nations that treat us badly, we will calculate the combined rate of all their tariffs, non-monetary trade barriers and other forms of cheating.” Okay then, we have a basis for those Liberation Day “reciprocal tariff rates”.
Trump’s Liberation Day reciprocal tariff rate for Switzerland is 32%. But Switzerland does not have any tariffs on the United States to be “reciprocal”. So clearly there must be a lot of other trade barriers and cheating from Switzerland?!!
Maybe it’s trade deficits, which Trump has decried as innately unfair, and wants to use tariffs to close those trade deficits. But Trump is making some dubious assumptions about the fundamental reasons behind those trade deficits. If two countries are “economically equal” (forgive the definitional hand-waving required here), then perhaps trade deficits can be explained by unfair trade practices. So let’s go with this for a moment.
The Trump administration released tariff rate justifications that took each country’s trade deficit with the United States then divided by its exports to the United States. Uh, what? Economically developing countries like Lesotho produce diamonds that we buy, but they do not have very much economic wealth and do not buy much from the United States, therefore there is a 99% ratio (essentially 1 to 1) between what we buy from Lesotho and the gap in what we trade with them.
Stats about Lesotho:
At $2.118 billion (with a “B”), Lesotho’s GDP is less than half of Trump’s net worth.
With 2.3 million people, Lesotho’s population is the same as Houston, TX.
With a median adult net worth of just $266, Lesotho adults can’t buy much of anything from us.
So yeah, the Liberation Day ratio is essentially 1 because they don’t buy anything from us, our trade deficit is entirely because we buy from them. No tariff rate will give Lesotho the money needed to buy as much stuff from us as we buy from them.
Other economists, trying to be more academically serious about Trump’s tariff methodology, have noted that: “Their mistake is that they base the elasticity on the response of retail prices to tariffs, as opposed to import prices as they should have done,” the scholars wrote. (Economists take issue with Trump's tariff formula, arguing rate is inflated).
Taking another angle, Republicans just argued in 2024 that raising minimum wage would backfire because fast food restaurants would become more incentivized to automate more expensive labor through robotics rather than hire people (Yes, California’s Fast-Food Minimum Wage Law Has Killed Thousands of Jobs | Cato at Liberty Blog). Does not the same argument apply here, that using tariffs to make American labor more competitive with labor in other countries would not result in more jobs, but in more automation?
Trump has cited the goal of bringing manufacturing back to the United States. But what happens when those tariff rates are not high enough to bring parity between labor costs in the U.S. versus in China or India? Production worker salaries in India, for example, are SIGNIFICANTLY less than in the United States, to the tune of $32,000 versus $2,000 per year - it will take significant price increases to bring U.S. labor to parity with (down to) Indian labor:
If tariff rates are not high enough to incentivize countries to onshore that labor, then companies will merely keep their operations in low-cost countries and pass on the tariff costs to U.S. customers. That just becomes a sales tax increase then, instead of bringing manufacturing jobs back to the U.S. Or in Nike’s case, as Peter Schiff wrote, Nike 'Won't Build Factories' In US, They Will Sell To Countries Like China.
Finally, in response to the predictable harmful economic effects of Trump’s tariffs, Trump has begun issuing exemptions to select industries and companies. For example, Trump issued tariff reprieves for the auto industry (Trump signs order easing some auto tariffs) and for smartphones and computers (Trump exempts phones, computers, chips from new tariffs).
Look, every reprieve from tariffs amputates the effectiveness of those tariffs on their intended purposes. Whether it’s bringing countries to the negotiating table, or incentivizing companies to reshore manufacturing jobs, or closing trade deficits, or whatever, the intended job creation and GDP growth will not materialize by doing this.
It’s no wonder that investors are losing confidence in this environment. In my view, it is highly Likely that political pressures will mitigate Trump’s rash on-the-fly policy making. As I wrote last month,
“Ultimately, with all the campaign contributions from big business, and all the retirement funds in the stock market, if tariffs are as bad for corporate profitability as critics suggest, then stock prices could certainly plunge even further. If there is sufficient economic pain on both Wall Street and Main Street, the political pressures could be much faster and more effective than legal challenges at reining in Trump’s tariff policies.”
Of course Trump will want to save face against economic realities, definitely not admitting to faulty world views or ineffective policies. I suspect his tariff policies will end similarly to Trump’s first term renegotiation of NAFTA into the USMCA, by which some changes were made but those changes did not bring the jobs back to the United States as Trump claimed (if they had, Trump could not make the claims he is now making about American manufacturing). Trump can save face by claiming companies are making historic investments into the United States, that manufacturing is back, that America is no longer being taken advantage of. But evidence for those claims will not be found in GDP or employment metrics.
ONE MORE THING…
No cellphones at the Masters. Trump’s tariff-ying policy announcements could not come at a worse time for patrons at the Masters. Augusta National’s no cell phone policy meant big surprises when patrons got back online. They Went to the Masters. They Ditched Their Cellphones. Then the Markets Went Completely Crazy. - WSJ
That’s not how Boards work. It’s convenient to think that Fed Chair Jerome Powell sets rates. Convenient, but wrong. If Trump wants rate cuts, he would likely need to replace the Fed's full board along with Powell
The Dollar - watch this space. America First may have unintended consequences in an economically interconnected and dollar-denominated world. Investors are growing concerned about a U.S. asset exodus as Treasurys and the dollar decline
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