Concepts of a Plan

Tariffs were announced on Saturday and they are supposed to go into effect on Tuesday. Trump laughably used the phrase “I have concepts of a plan” when asked about his plan for healthcare reform. He had some idea of what he would like to see from a bigger picture perspective, but very little in terms of actual details. He’s not exactly a deep thinker. An example of Trump only having “concepts of a plan” was when he blanket froze federal grants and loans and later found that there were numerous areas that weren’t thought through. Well, he/we are going to go through a similar discovery process as we go through Trump’s concepts of a tariff plan.

In the bigger picture, Trump appears to think that trade balances should be zero. There are many economists who disagree. However, I don’t think Trump is necessarily “wrong” from a nationalistic/jobs perspective. The basic argument that economists in ivory towers use is that you maximize some function of global resources and global welfare by having free trade. In practice, what happens is that the wealthier countries get stripped of outsourceable jobs leading to among other things massive wealth disparity within the country. Before you know it, the masses are so angry that any simpleton who promises to restore the balance gets elected to be President or PM. But I digress…

It seems to me that the 25% tariff percentage towards Canada and Mexico mentioned by Trump are not “coincidental.” If you look at Canada and Mexico in combination, 21% tariffs on imports (when added to the trade balance) would cause the trade balance within USMCA to approach 0. The “zero trade balance” percentage for Canada is 14% and for Mexico it’s 28%. So 25% for an opening salvo is not unreasonable if you wanted to approach the pair as a tandem. The 2021 data below is from Wikipedia, so the current data could be slightly different, but will not materially change the discussion.

The zero trade balance percentage for China is 70% and for the EU is 42%. So that is probably where Trump is getting China tariffs being 60% from. The final negotiated settlements may not be fully related to the “zero trade balance” percentage because there are strategic/political considerations other than to get a zero trade balance. But this is how you can get a “concept of a plan,” when you just got into office two weeks ago, didn’t work on the plan earlier and don’t want to look stupid and weak to your base.

I mentioned that pundits had suggested that Trump would go slow, but I also mentioned that it makes more sense to start off big – even bigger than promised during the campaign. Maybe people in ivory towers don’t take negotiating classes. Since I have an MBA, here are some things to consider about basic negotiation strategy (not in any order):

1) You generally start off big. In Trump’s case, he also leverages the “crazy” image he has - maybe talk about annexing Canada, Greenland and Panama beforehand to enhance the “go big or go home” image.

2) Prepare for responses. It was cute how Trump put in an automatic escalator clause, as a feeble attempt to prevent retaliation. But no self-respecting country is just going to accept tariffs. Canada seemed to imply they would retaliate on half of all imports (over time) from the US. Maybe ~50% tariffs are strategic depending on Canada’s needs, and maybe that is an attempt at being de-escalatory. Mexico, China and the EU all promised reprisals, but you would expect something < 100% of retaliatory tariffs.

3) Don’t show weakness. The fact that Trump was concerned about oil prices and only put a 10% tariff on oil opens the door to attack. I don’t know if Little Lord Fauntleroy (Trudeau) has it in him, but if Canada wanted to punish the US they could slap (or threaten to slap) a massive export tax on oil (or energy or any other critical materials) to the US. I don’t know enough about the particulars of each country’s export/import mix to have a view on specific measures. But neither does Trump. If Trump is going to be acting on “concepts of a plan,” I would have preferred he just make it 25% across the board and send out subsidies if he has to, like he did with the farmers during Tariff I. The outcomes are similar.

4) Negotiate with the party easiest to get a deal with. This is a common negotiating tactic (like in the auto industry). That’s why he is starting with Canada and Mexico. The supply chains are so inextricably linked that a deal needs to get done. Then use your gains to leverage other countries.

5) Negotiate from strength. The US economy is looking great right now, and in a better position to withstand some economic turmoil.

6) Figure out what you want to achieve. I am not sure he knows. He may be putting out feelers on what he can get. Don’t be surprised if you see apparent Trump “flip flopping.” In a vacuum, he probably wants the tariffs to stick without retribution to bring the trade balances back to zero and maybe jobs back to the US. And I want world peace, an end to hunger and to be massaged by 72 virgins. But we should limit discussions to what is possible in the real world. The way I see it, there are two main extreme outcomes, with all kinds of possibilities in between:

a. MAGA Trump. I can be persuaded that “smaller” trade balances would be beneficial to the US and through tariffs and fiscal incentives, we can bring some manufacturing/jobs back to the US. So maybe Trump asks for 25% and gets 10-15% with some kind of phase-out based on some defined progress. Maybe exclude foreign companies in Mexico from cheap trade. Rewrite a NAFTA that makes sense. Maybe talk to companies to phase in jobs back to the US. You get the idea. The road to this outcome could be difficult and may involve a stock market correction and a recession, as many industries may be disrupted during this multi-year process.

b. Cosmo Kramer coffee deal Trump (Seinfeld reference). Some people have pointed out, “Why start on Tuesday? Why not now?” “Curbing fentanyl and immigration” seem to be excuses to use the emergency tariff powers. It doesn’t cost much to hire a few extra border guards (relatively). So it could take very little to agree on border terms. Maybe Trump is looking for a “quick win” in the next couple of days/weeks. Get Canada and Mexico to agree to “halt fentanyl and immigration,” that they will have no problems doing (or are already doing). Declare victory. Claim to be the greatest president since Washington and start a commission to get your face on Mt Rushmore for this “monumental” achievement. #Winning

Here are some market dynamics that are on my radar: