Market pundits and some powerful politicians now believe that President Donald Trump folded his cards on tariffs when he signaled earlier this week that he would unilaterally reduce his tariffs on China and that he is open to compromise on his tariff policies against the global trading partners of the United States.
Many international investors now speculate that countries will just wait Trump out on the matter of tariffs. They have concluded that Trump is bluffing because he has clearly indicated that he wants lower yields on U.S. Treasurys and that he will not accept a plummeting U.S. dollar. Trump now understands that generalized tariffs are terrible economic policy because financial markets are screaming that message.
Recommended Stories
- The world-shattering effects of the US-China AI race
- Putin shows NATO his dangerous Balkan hand
- Qatar's quiet campaign: How Doha is buying America
It is true that there are certain pain points in global financial markets that Trump will not tolerate. But it is dangerously delusional to conclude that Trump will give way on all tariffs. America’s trading partners are seriously erring in judgment if they just wait for Trump to surrender.
Make no mistake, Trump believes in tariffs at a deep ideological level. Moreover, Trump will only go so far in compromising on his tariff policies. To a degree, Trump will insist on some tariffs because they will provide revenues, which Trump needs to offset tax cut policies that Trump has also promised. Put simply, Trump may have folded his cards in the first game of the tariff negotiations, but there are many more games to play, and Trump holds a lot of aces.
Yes, the U.S. economy only accounts for about 26% of the global economy, but by itself, the U.S. economy is by far the world’s largest economy. That means Trump can use the economic power of the U.S. to address perceived unfair trade practices on an individual country-to-country basis. For what it’s worth, I have argued that tariffs are generally a very poor policy tool in that they reduce U.S. consumer choices and drive up consumer costs. They hurt the vast majority of Americans to benefit only a few. Still, if Trump wants to address specific concerns with specific countries, tariffs offer him a way to do so on an individualized basis.
Let’s consider some examples in relation to Europe.
The countries of Europe take unfair advantage of the U.S. through restrictions on the U.S. agriculture sector. The European Union and the U.K. say U.S. agricultural products are unsafe because U.S growers use genetically modified organisms and unsafe pesticides. But the science is clear: GMO foods and American pesticides are safe. If Trump tariffed European imports in relation to this specific concern, the Europeans would eventually compromise on GMOs. The countries of Europe also take unfair advantage of the U.S. through their pricing systems for prescription medicines. U.S. consumers effectively pay all of the burden of the development of life-saving drugs. Tariffs could address this discrimination against American households.
Similarly, the economy of the U.S. is about 8 times larger than the economy of the U.K. President Trump can easily use that size advantage to squeeze trade concessions from the British government. Trump can find the pain points of Britain’s international trading patterns. Trump can pressure Prime Minister Keir Starmer by restricting exports of oil and natural gas, as well as commercial aircraft and associated engines, to the U.K. Of course, the U.K. example also offers the flip side concern of how far Trump is willing to risk critical alliances over more nominal concerns.
TRUMP’S PEN CAN COUNTER CHINA ON RARE EARTH MINERALS
Or what about Germany? The largest economy in Europe. Germany is especially vulnerable to Trump’s tariff policies. Manufacturing is central to the German economy. The German manufacturing sector is already besieged by Chinese manufacturing exports. If Trump turns the screws on the German manufacturing industry, German concessions will soon be forthcoming. After all, the economy of Germany has experienced stagnant growth for several years.
Top line: Trump could change his tariff negotiating strategy and “attack” each trading partner one by one. The best outcome is a broad array of deals to reduce tariffs and increase truly free trade to benefit all parties. But those who say Trump is out of options and ready to surrender should think again.
James Rogan is a former U.S. foreign service officer who has worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society. He can be reached at [email protected].