Key Takeaways from President Trump’s “Liberation Day”
In case you missed it last week, President Trump unveiled sweeping tariffs last Wednesday afternoon on a wide variety of nations.
President Trump implemented a minimum tariff level of 10%. The White House then took the individual trade deficit with America for each country divided by the amount that America imports from said country and cut that percentage in half to determine the reciprocal tariff rate. The market reacted quickly to this news and also the news that China would be implementing 34% retaliatory tariffs to end the week sharply lower. Let’s take a look at some potential takeaways from the announcements.
#1 Trump and his Administration are Following Their Plan:
Before Trump’s inauguration, many individuals were rushing to predict what President Trump’s Second Term may look like. During this time, a paper titled “A User’s Guide to Restructuring the Global Trading System” was passed around. The paper, written by Trump’s economic advisor Stephen Miran, outlines much of what Trump announced today and how it has been accomplished. The paper asserts that a baseline tariff of 10% is the starting point and that an effective tariff of around 20% is welfare increasing for Americans. Today, the effective tariff rate stands at 23%. The paper suggests using the IEEPA for accomplishing unilateral international economic policy, which is the exact Act cited by the White House as legal justification. Lastly, the paper also states that substantial market volatility is to be expected which may tell us why the administration has been dismissive of the market volatility surrounding tariffs.
Obviously this paper holds weight in the White House, so what else can be inferred from the paper going forward?
First, it is clear that Trump's next step may be a deal on currency with China and other nations. Treasury Secretary Scott Bessent has reiterated this in a recent sit down interview with Tucker Carlson. Bessent claims that the U.S. would like to increase its manufacturing output while China would like to increase its domestic consumption. It is not hard to imagine a coming deal with President Trump and Chinese leader Xi on potential US currency devaluation in which excess Chinese manufacturing capacity is moved to the U.S. But this currency deal is not just with China, today, Peter Navarro claimed that simply eliminating tariffs on American exports would not be enough in reaction to Vietnam offering to remove all tariffs. There is clearly a desire from the White House to create a multilateral currency agreement to make the dollar more competitive abroad.
Also an important takeaway from the paper is that Tit-for-Tat retaliatory tariffs are not welfare increasing, suggesting that those around the President understand a trade war is not a positive outcome from the policy.
Miran’s paper asserts that tariffs may be an important stream of revenue for the Federal Government, suggesting that tariffs may not be going away anytime soon, which has been backed up by Trump in recent statements. This assertion again falls in line with Bessent’s plan to keep the budget deficit around 3% and Trump’s plan to extend tax cuts as well as eliminate overtime tax.
Although the paper does not explicitly define an endpoint, it can be assumed that if the trade deficit is reduced, the tariff revenue can be replaced by the increased revenue earned from the domestic manufacturing expansion.
#2 The Trade Deficit is a Major Issue for the Administration
Warren Buffett is rarely wrong, although he is usually early (remember when many were questioning his huge cash pile for the last few years as the markets shot to record highs). In 2003 Buffett wrote an article in Fortune magazine that describes the current situation the U.S. is currently in and how to address it. The article is definitely worth a read and you can read it here.
Essentially, Buffett argues that a country that continually outsources production to a neighboring nation will soon end up being owned by the neighboring nation. This is exactly the case today with the US - China relationship. He was also precinct in his call that eventually the lending nation will start to question the validity of the debt of the debtor nation and instead start to move into alternative assets such as land or stocks. This has certainly been the case in the US where China has not been a net buyer on US bonds since 2014 and instead has opted for assets such as land and stocks. It is not just China either, sovereign wealth funds such as the Norges Central Bank have piled into Mag 7 stocks as they look for places to park their excess Dollars earned through trade surpluses.
However it has become clear that not everyone agrees that a trade deficit is a negative. A few popular counter arguments that deserve attention are:
Not all trade deficits are bad. Some countries are in different development stages and cannot afford our goods.
The United States cannot compete with nations that employee essentially slave labor to manufacture.
It will take years to stand up brand new manufacturing facilities
This first point is entirely true. Some trade deficits are bad as some countries are naturally going to produce better goods and services for less, however if we remember that President Trump’s next step is most likely to create a currency deal, most countries will need to be on board as the Dollar is the reserve currency. This may explain why poor nations with relatively small surpluses are getting included in the barrage. Ultimately, the goal should not be to have a huge domestic surplus with every nation, as global competition is a net benefit.
Again it is true that the United States will not be able to stand up sweatshops domestically to compete with countries that depend on slave labor to keep manufacturing costs low. However, American Tech companies are the envy of the world and creating a manufacturing and tech partnership to build out advanced manufacturing capabilities may be the next logical step in the onshoring plan as American wage laws protect the worker but also make the US less competitive globally. Since almost every commenter has made comments about the lack of a competitive labor force in the U.S., it can be assumed that the administration knows this and given Trump’s support of AI investment, this partnership seems inevitable.
Finally, many have correctly pointed out that it is tough to stand up entire manufacturing facilities in a short period of time. However what many have not taken into account is that the onshoring trend in U.S. manufacturing actually started after covid in 2021. For the last 4 years, manufacturing construction spending has increased by double digit percentage points and has been the largest source of construction spending in the U.S. for years. There is manufacturing capacity that is ready to come online in the U.S. as these projects that started in 2021 start to wrap up.
#3 The United States Stock Market may not enjoy the relative outperformance that it has enjoyed over the past few years.
Since Covid, the U.S. Stock Market has had many double digit return years and has attracted foreign capital far more than any other market. There has been huge amounts of excess liquidity that have worked its way into US assets such as land or stocks. Where has that liquidity come from? As countries have a trade surplus with the U.S., they accumulate excess dollars and need to find a place to hold these reserves so that they are able to use them to pay for imports. Historically the dollar assets have been exchanged for treasury bills as these assets pay interest, however as the US printed a ton of money during Covid and beyond, many became wary of holding treasury debt as its value eroded away from inflation. Therefore, many countries piled into assets such as stocks, gold, or land, inflating these prices.
As President Trump looks to shift the global trade dynamic, it seems that in the years to come foreign nations may no longer accumulate excess dollars on a scale currently being seen. This will ultimately cause stocks and other assets to underperform the last few years as global trade starts to balance out.
Ultimately, no one has a crystal ball to say how the tariffs eventually work out. There have been many comparisons to Smoot-Hawley however that was during a time when the US was a net exporter and not a net importer. There are also reasons that foreign countries are reacting so harshly to this announcement. If this policy solely hurt the U.S. then other countries would not care, but we are seeing the exact opposite. As Miran so aptly titled his paper, Trump is looking to restructure the entire global trading system, a high risk and high reward plan: expect turbulence.
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