3Sem.·

Aug 6 / Now India Must Pay

After Switzerland, Brazil and the EU, India has become the latest target of Donald Trump’s trade war fantasies. India now faces a tariff rate of up to 50% for purchasing oil from America’s legacy enemy Russia.

Why is President Trump doing this? Doesn’t it do more harm than good to his economy and global trade relations? Probably, but the truth is that the former businessman doesn’t seem to care much. By know, we know his tactic: Scare the enemy. No matter how mighty their economy may be, slap a ridiculously high tariff on them, then start negotiating.

While seasoned diplomats or old-school presidents might prefer to talk first, threaten later, if inevitable, Trump flips the script. In fact, he’s a bully, the greatest of them all. And the negative connotations of the word “bully” aside, his strategy seems to work. President Trump has a unique ability to force outcomes that favor his agenda.

We started the year with practically zero tariffs on major imports. Then came April 2nd, “Liberation Day”, where markets experienced a cold awakening. That day, everybody’s worst fears came true: exorbitant tariff rates on every country from Germany to the Easter Islands. No one was spared. And what was the cherry on top? The rates were based on a flawed formula not even his advisors seemed to fully grasp, though I doubt Peter Navarro could grasp the breakfast menu, let alone math. The man that managed to start a feud with everyone, from Elon Musk to John Doe.

Since then, several deals have been struck, with varying degrees of success. The EU, for instance now faces 15%, which is celebrated as a massive win, while forgetting that it’s 15% points more than before. And what did markets do? Nothing. Completely disconnected from fundamentals, equities marched higher setting fresh all-time highs.

While that’s largely due to the phenomenon of the “TACO-Trade”, what investors take lightly is the fact that tariffs remain elevated and significantly higher than last year. Yes, Trump tends to chicken out, but his plan is more calculated than it appears: The order of events is repetitive:

1. Look for a camera

2. Announce absurd tariffs, while markets collapse and WSJ’ journalists type their fingers sore

3. Extend the deadline a few days later

4. Strike a “historical”, though rather symbolic deal

5. Redistribute corporate profits into Treasury coffers

But enough criticism for now. In the end, only time will tell whether Trump’s strategy results in an economic boom and global investment into the U.S., or a lasting decline in American influence and global standing. Though I would bet on the latter.

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19 Commentaires

Shrimpman@Shrimpman

3Sem.

But the market is hardly reacting any more

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TotallyLost@TotallyLost

3Sem.

@Shrimpman The market doesn't care until it does.
It's like valuations, they don't matter either and then at some point they do. 😅

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Konstantin Harrer@MozartTrading

3Sem.

@Shrimpman true, the market doesn’t care about the announcements anymore, but, as we saw last week, it begins to care when the tariffs eventually appear in the statistics. The bad job report was probably just the beginning of a series of disappointing quarters ahead.

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Shrimpman@Shrimpman

3Sem.

@MozartTrading Yeah, I am also sure the economic data will be revised down like in 2008 and that could definitely lead to a big drop, so I keep over 20% in cash

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Luc700@Luc700

3Sem.

We are living in a SouthPark episode

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Uwe@SchlaubiSchlumpf

3Sem.

Problem with bullies: many comply on short term. But the longer the bully does it. The more he looses friends. European states will seek independence from the US. Companies already see the US as insecure market. Trump threatened with high tax so companies get more interested in moving production to the us. This didn’t happen as far as i‘ve seen. A few publicity cases yes. Those were planned long before. Linus tech tips moved to different computer part companies. Most of them said, there is no use in moving production to the us. Expensive Labor. Insecurity what comes next. They either stopped selling in the US or seek to move production to lower tax countries

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Uwe@SchlaubiSchlumpf

3Sem.

@SchlaubiSchlumpf but as others have said: higher taxes for India in this case make sense for western interest. Even if I don’t know about the height. Makes sense that he starts pushing our common interest since we (EU) committed to such a big agreement that benefits the US very strongly.

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Konstantin Harrer@MozartTrading

3Sem.

@SchlaubiSchlumpf I think that’s the biggest flaw in Trump’s plan: Isolating cheap labor countries like India and China could work, but then you shouldn’t punish the EU or Japan, both of which operate on a more or less equal playing field. Establish free trade zones between high-tax, industrial nations like those and draw production back there, but don’t try to play isolationist and hope for the best while the global economy collapses.

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Shrimpman@Shrimpman

3Sem.

@MozartTrading Its also the fact that he Tarrifs goods that are only a small % of the value chain, like aluminum. There is a reason why Us company’s outsourced many productions and that is because that enables them to focus on the high margin high tech last steps in the value chain (which leads to a higher gdp per capita). The only reason to do every step of your value chain in your country is for critical industries like defense or if you plan on completely isolating yourself (which you would only do if you plan something evil, since you plan for sanctions)

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Konstantin Harrer@MozartTrading

3Sem.

@Shrimpman very true, I haven’t thought of that yet. Actually a good point.

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Uwe@SchlaubiSchlumpf

3Sem.

@Shrimpman exactly. I do even understand (kinda) trumps anger on some points. We have higher Environmental and Consumer Protection standards. That’s a high bar for US-Companies and could lead to a trade deficit. While I don’t see that as unfair policy, I kinda do understand his anger with taxation on US cars by the EU. But Trump should have aimed to killing those taxes instead of playing uno reverse with double impact. I feel like EU only did comply because of military dependency to the US. Once that is resolved… who knows.

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Shrimpman@Shrimpman

3Sem.

@SchlaubiSchlumpf I think it might have been a misstep for us to agree to purchase US weapons as part of the deal, since I think we as the EU should build up our defence industries to get more independent and also to provide jobs to those who worked in the car industry, since the skill sets overlap.

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Uwe@SchlaubiSchlumpf

3Sem.

@Shrimpman same for Energy. Europe needs to become more energy independent. Buying billions in (probably fossil) energy results in technological lock in effects. It hinders us going more independent. Renewables would make us more independent from US/Russia/middle east and is more resilient in case of attacks on energy infrastructure

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Shrimpman@Shrimpman

3Sem.

@SchlaubiSchlumpf Nuklear Energy ist the best solution in my opinion

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Uwe@SchlaubiSchlumpf

3Sem.

@Shrimpman depends. I think. I feel like it’s very unsafe in a war and it makes more dependent in theory since we don’t have much Ressourcen. But it would work I guess. But at least Germany would take to long to ramp up on nuclear, when taking construction times including planning phase into account.

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Marcel@di_marcello

3Sem.

Another well written and thought through post, my compliments to you!

I do believe there are other reasons behind the the tariffs than increasing the Treasury coffers that Trump himself doesn't mention, but others in his cabinet do (i.e. Scott Bessent).
The restructuring of the global trade market for example, with the focus on China as the current main producer of goods / half fabricates.

With that in mind the high tariffs of countries like India make sense, since they are known of being a port for circumventing restrictions of other countries (Russia, China, etc).

And yes, only time will tell if their plans and strategies work out (for them).

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Konstantin Harrer@MozartTrading

3Sem.

@di_marcello Thank you, really appreciate your remarks.

As for Trump and the tariffs: I also assume that he, at least in his mind, has a plan outlined. Though, I have no idea how that could look like. At the moment what major companies like Caterpillar have stated is that they are facing massive levies that negatively impact profits. We are talking about billions here, and these billions are what Bessent runs around with, bragging about the additional income for the government and debt reduction.

Obviously the plan isn’t solely debt reduction, because every sane economist knows that it’s probably too late anyway and you will never be able to go back to old levels.

Isolating countries like India, China etc on the world stage could work, and eventually draw back production to the US, but to what price? In the end the consumer pays the difference which leads to less consumption and inflation. And btw if that’s his plan, then he shouldn’t punish Europe or Japan for example and create free trade zones between these regions to foster international cooperation between similar economies and levelling the playing field.

But again, maybe he is right. Only time will tell.

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mkaps@mkaps

3Sem.

Markets reacted heavily 3 times. Every next time reaction was less hard. My portfolio is mainly focused on EU. I’ve continued to invest and it starting to payback. Companies are reorienting. Also new trade deals are signed or in working for eu. Basically the whole world learning to live and operate without US and US products. Time will show. I’m positive

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