The Breakdown - Trump's Tariff Trouble

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Thursday, April 3rd, and you better believe we are talking tariffs today. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link at the show notes are going to bit. at L.Y slash breakdown pod. All right. Well, after months of anticipation, President Trump has unveiled sweeping tariffs

Starting point is 00:00:40 that will fundamentally reshape global trade. Declaring it to be Liberation Day at an event in the Rose Garden, Trump said, for years, hardworking American citizens were forced to sit on the sidelines as other nations got rich and powerful, much of it at our expense. Now it's our turn to prosper, and in so doing, use trillions and trillions of dollars to reduce our taxes and pay down our national debt, and it'll all happen very quickly. Now, the tariffs are much broader than anyone had imagined. The administration will impose a 10% tariff as a baseline on all countries, friend and foe alike.

Starting point is 00:01:11 These will go into effect from midnight on Saturday. In addition, reciprocal tariffs will be levied against 57 countries that the administration views as having unfair trade barriers in place. Those rates are determined on a country-by-country basis, using a formula that theoretically is designed to take into account currency manipulation, non-tariff trade barriers, and other forms of quote-unquote cheating, although Ryan Peterson from Flexport tweeted, Flexports team was able to reverse engineer the formula the administration used to generate the so-called reciprocal tariffs. It's quite simple. They took the trade deficit the U.S. has with each country and divided it by our imports from that country.

Starting point is 00:01:45 Coming back to Trump, he said, for nations that treat us badly, we will calculate the combined rate of all their tariffs, non-monetary barriers, and other forms of cheating. And because we are being very kind, we will charge them approximately half of what they are and have been charging us. So the tariffs will not be full reciprocal. I could have done that, yes, but that would have been tough for a lot of countries. The 57 countries affected range from close allies like the EU, Japan, and South Korea, all the way to adversary nations like China and Syria. The reciprocal tariffs will be added on top of the baseline as of next Wednesday. Now, the power to impose tariffs without the approval of Congress stems from the declaration of a national emergency.

Starting point is 00:02:20 The text of the executive order signed by Trump stated that, quote, large and persistent annual trade deficits constitute an unusual and extraordinary threat to the national security and economy of the United States. The lengthy order claims that the trade deficit has undermined U.S. prosperity in a multitude of ways, including weakening national defense production and causing the decline of the manufacturing sector. The White House said these tariffs will remain in effect until, quote, President Trump determines that the threat posed by the trade deficit and underlying non-reciprocal treatment is satisfied, resolved or mitigated. One thing that's important to note is that despite Trump beating the tariff drum loudly since the campaign,

Starting point is 00:02:53 doesn't really seem like anyone expected anything close to this level of tariffs to be imposed. Danny Kirsch, the head of options at Piper Sandler, said, It was pretty shocking. This is much higher than the market expected. Olusanala, the head of U.S. economic research at Fitch ratings, said the average tariff rate charged by the U.S. would increase from 2.5% to 22%. He commented, Many countries will likely end up in a recession.

Starting point is 00:03:15 You can throw most forecasts out the door if this tariff rate stays on for an extended period of time. Scott Linsicum and Colin Graebaugh of the Cato Institute wrote, With today's announcement, U.S. tariffs will approach levels not seen since the Smoot-Hawley Tariff Act of 1930, which incited a global trade war and deepen the Great Depression. Some factions of the Republican Party are already mobilizing to push back on Trump's tariff agenda. Senator Rand Paul made the argument that this high-risk strategy could be devastating if it doesn't work perfectly. He noted that following the Smoot-Hawley tariffs, the Republicans lost control of Congress for more than 60 years. Adding, I would argue that tariffs, particularly

Starting point is 00:03:48 if it leads to a recession, are devastating politically. Now, the difficulty with analyzing the tariffs is that there are two things to assess at the same time. The Trump administration has made the goals of the tariffs pretty clear, to rebalance global trade, reshore the manufacturing base, raise revenue, and to negotiate trade relations with China. There are reasonable people on all sides of the political spectrum that can agree that many of these are good and necessary goals. Many people, for example, believe that the global trade system has been broken for decades and a fundamental change is necessary. That is, of course, a completely separate question of whether these specific policies will be effective in bringing about positive change or achieve any of the stated goals. There's also the question

Starting point is 00:04:24 of which of the goals is actually most important. Palmer Lucky, the CEO of Anderil tweeted, Unprecedented embrace of protectionism, they say. No, reciprocal tariffs are the opposite. The whole point is to encourage free trade rather than lopsided, quote-unquote, free trade that we currently have with so many countries. It's very simple. If they charge us, we charge them. Anthony Pavliano, who has been one of the only loud vocal pro-tariff voices, tweeted, I've been saying for weeks that we should implement a 5 to 10% blanket tariff on all imports. We can then remove tariffs as an incentive system for specific products. Today, President Trump announced this exact type of plan with a 10% tariff on most imports. Pomp added, all the finance folks are complaining about the tariffs while all the working class

Starting point is 00:05:03 folks are cheering for them. Perfectly sums up who the policies are intended to help. Now, I should note that one of the hallmarks of this show, or at least one of the things that we try to have the Hallmark B, is to not necessarily be super-opinionated ourselves and inject a lot of my take on things, but instead to curate a wide variety of takes to understand where the general meta-conversation is. In most situations, it's not all that hard to find thoughtful arguments on all sides of a particular question, whether we're talking about something specific to the crypto industry or whether we're talking about broader macro. I will say that the lopsidedness of the anti-tariff side versus the pro-tariff side is extremely notable in this case. There are very few people.

Starting point is 00:05:41 who are loudly declaring their alignment with this policy. And of course, part of that is not even about the theory of tariffs. It's that in practice we have no idea how this will actually change the global economic order. We don't have any real analog beyond the smooth-holy tariffs of the 1930s that crippled world trade. Senate Democrat leader Chuck Schumer is pushing the idea that the tariffs will be inflationary, stating this is a huge tax on American families, all to help billionaires get a tax cut. He used the logic that the cost of everything will go up by at least 10% across the board. In a research note, J.P. Morgan wrote, Today's announcement would raise just under 400 billion in revenue or about 1.3% of GDP, which would be the largest tax increase since the Revenue Act of

Starting point is 00:06:19 1968. We estimate that today's announced measures could boost prices by 1 to 1.5% this year. However, they added that the hit to purchasing power would take real income growth negative by the middle of the year, end quote, take the economy perilously close to slipping into recession. Their big point in one of the key issues with the way these tariffs have been implemented was that, quote, the somewhat confusing nature of today's news, coupled with uncertainty over how long these tariffs will remain in place, should make for an even less friendly environment for investment spending. Bharat Ramamurti, the deputy director of the National Economic Council during the Biden administration,

Starting point is 00:06:52 took a similar issue with the tariffs. He stated, if the goal of all of this is to revive certain domestic industries, which is a goal that I support, tariffs have to be in place for years and years with certainty for investors to make a decision that this is a good use of capital. The problem with the Trump tariffs is that they're completely unsstrategic. and there's no plan for how long they're going to be in place and what the triggers are for them to go up or down. So it doesn't provide any certainty for investors in the U.S. to decide what to do. And seeming to reinforce the point that no one has any real idea about how this plays out, trader and author of the Daily Dirtnap newsletter, Jared Dillian,

Starting point is 00:07:22 is pounding the table on the other side tweeting for the millionth time, the tariffs are deflationary. His logic is that jacking up prices on imports is likely to cause a steep drop in consumption. The last two times tariffs of this magnitude were imposed, that was exactly the outcome. In the 1920s and 1930s, deflation in the U.S. hit a peak above negative 10%. Paulo Macro added, no, they are recessionary. There is a difference. Now, one of the big issues with how these tariffs are coming into force is that there's a lot of daylight between how the policy is being explained and how it works in actuality. The main reason people are supporting these tariffs is the idea that they will force other

Starting point is 00:07:55 countries to lower trade barriers. Pomp, for example, commented, tariffs forced countries back to free trade. Very simple concept but misunderstood by most people. Tech lawyer Preston Byrne wrote, there will be two worlds after this. There will be the America sphere, where America is the central node in a free trading network, free speech, minimal internet and tech regulations, zero percent tariffs on anything moving through America. Then there will be everything outside of it. Today's episode is brought to you by Crypto Tax Calculator. If you're looking for accurate crypto taxes with no guesswork, check out Crypto Tax Calculator. Get accurate CPA-endorsed tax reports with full support for IRS rules. For those who have fallen down the on-chain rabbit hole,

Starting point is 00:08:34 CTC has you covered with more than 3,000 integrations. They have full support for defy staking in NFTs. Import directly to TurboTax or H&R block or share securely with your accountant. Create an account, import your sources, and review. It's that easy. Hello, friends, I am thrilled to share that Ledger is once again partnering and sponsoring with the breakdown. Many of you know, but for those of you who don't, Ledger is the most secure hardware wallet for your crypto and logins. It's trusted by 7 million users and secures 20% of the world's digital assets. What's more, Ledger is a lot more than wallets. Over the recent years, they've built a comprehensive ecosystem of products and services, all of which are designed to make

Starting point is 00:09:13 digital ownership more secure and accessible. You can buy your Bitcoin with Ledger and Ledger Live, and so much more. Basically, not only did they want to keep your assets secure, they want you to be able to do more with them. Ledger's newest devices, the Ledger Stacks and Ledger Flex, introduced the world's first secure touchscreens, making it easier and safer to manage your transactions and assets. Alongside Ledger Stacks and Ledger Flex, the company, also launched the Ledger Security Key app, offering a safer alternative to traditional passwords and enhancing your digital security. If you are in this space, you owe it to yourself to at least check out Ledger and their ecosystem what they have available to you. So thanks, once again,

Starting point is 00:09:48 to Ledger for sponsoring the show. One of the challenges is that the reciprocal tariffs don't really seem to line up with actual trade barriers in place. Tariffs on the EU are set at 20%. For India, the number is 27. For China, it's 34%. What's more confusing to some are the somewhat random tariffs applied to smaller nations. Madagascar has a 47% tariff applied, while North Macedonia will suffer 33% tariffs. Many noted that Tiny Heard and McDonald Islands were included on the list of friendly countries with 10% tariff supplied, remarking that the islands are pretty much uninhabited aside from a colony of penguins. Spencer Hakemian of Tulu Capital Management tweeted, these morons are actually going to break something. They've got some moron back there on Excel

Starting point is 00:10:28 picking random countries, giving them a randomly generated number, dividing it by two and making that the tariff rate. This is how stoned high schoolers do science projects. These are not serious people whatsoever. The Office of the Trade Representative actually published a long document explaining how the individual tariff rates were calculated, including a very complicated-looking economic math equation. The Trump administration explicitly aimed for a tariff rate that would, quote, drive bilateral trade deficits to zero. They wrote, while individually computing the trade deficit effects of tens of thousands of tariff, regulatory tax, and other policies in each country is complex, if not impossible, their combined effects can be proxied by computing the tariff

Starting point is 00:11:01 level consistent with driving bilateral trade deficits to zero. Essentially, they didn't even attempt to calculate the effects of other countries' tariffs and policies in order to reciprocate. They just assumed the trade deficits should be zero and punch those numbers into the formula. And this gets back to that math that I had mentioned from Flexport. There were actually a number of different accounts who ran these numbers and found that the tariff rate for each country was simply their trade deficit with the U.S. divided by total exports. That was then divided by two to reach the discount rate that Trump is offering. Interestingly, as some people noted, this is the exact formula produced by each leading AI model when asked the question,

Starting point is 00:11:33 what is an easy way to calculate tariffs that should be imposed on other countries so the U.S. is on an even playing field when it comes to the trade deficit? The White House confirmed that this is the logic, stating, the numbers have been calculated by the Council of Economic Advisors, based on the concept of the trade deficit that we have with any given country is the sum of all trade practices, the sum of all cheating. They called it, in a very Trumpian phrase, the most fair thing in the world. The White House Deputy Press Secretary later denied this was the method, insisting, quote, we literally calculated tariff and non-tariff barriers. They cited that complicated math equation replete with a bunch of symbols. But again, once you back out of the symbols,

Starting point is 00:12:08 the equation is literally the trade deficit divided by imports. The logic, let's say, has a few problems. Economic analyst Joey Politano tweeted, the Trump team calculated their reciprocal tariffs by just dividing the bilateral goods trade deficit by U.S. imports, which is how you ended up with 31% tariffs on free trade zealot Switzerland and 10% on heavy tariff user Argentina. Independent economic journalist, Terrick Booker wrote, part of the reason this is a stupid approach is it doesn't account for composition. Take Thailand, for instance, hit with one of the highest tariffs. Five billion a year or 10% plus of the trade deficit is rubber. Because you know, the U.S. is just clamoring to bring back rubber plantations.

Starting point is 00:12:45 And of course, even if the calculation is just back of the napkin math, the bigger issue is whether the approach has any chance of working. These are punishingly high tariffs on the entire world, but Trump has made his demands clear. At yesterday's event, he said, to all of the foreign presidents, prime ministers, kings, queens, ambassadors, and everyone else who will soon be calling to ask for exemptions from these tariffs, I say terminate your own tariffs and drop your barriers. The question will be whether the removal of all tariffs and trade restrictions will be enough to appease Trump or if he actually wants tariffs to remain in place until each country's trade deficit has been eliminated. During the earlier tariff dust up with Canada, for example,

Starting point is 00:13:20 Trump suggested he's actually thinking of the trade deficit itself as the problem. He said, spending $200 billion a year to subsidize Canada, and that number, of course, is not an actual subsidy, but the trade deficit. Now, there's nothing wrong per se with wanting the U.S. to become a net exporter to the world. The problem is taking a sledgehammer to global trade, and hoping trade rebalancing is the net result at the end of the day. It's not clear why trade would rebalance without the U.S. dramatically ramping up production across the board, which doesn't seem to be happening at the moment. Brad Sester of the Council on Foreign Affairs commented, even if you think the trade deficit is a problem, this is a draconian solution, one that doesn't

Starting point is 00:13:54 appear calibrated in any way to limit the pain of the adjustment to the U.S. economy. All the ballpark math points to the same conclusion. This is a massive shock and obviously a self-inflicted one. This is also very much not the policy spelled out on the campaign trail by figures who would later join the administration, like Treasury Secretary Scott Bessent and Council of Economic Advisors Chair Stephen Moran. Last November, Moran wrote an entire paper explaining the logic of gradual tariffs that would provide companies certainty and enough time to onshore their supply chains. Instead, what we've gotten is Trump's shock-and-aw version of tariffs that just ultimately seem entirely unsustainable. Some countries have already buckled to the demands.

Starting point is 00:14:30 Argentina, Vietnam, and Israel recently removed all tariffs on U.S. goods, but were still included in the new global policy. Vietnam in particular was one of the hardest hit, with 46% tariffs. With three days to adjust, complete uncertainty on how long these tariffs will remain in place, and no new industrial policy in place, it's very difficult to see how capital allocators can reshor the manufacturing industry based on this policy. Reinforcing the inclination that this policy is no good for capital allocators, markets have gone extremely risk off on the news. Trump waited until after the closing bell in New York to make his announcement, but the after-hour session was wild. S&P 500 futures were up 1.7% as the press conference began, yet as Trump began reading out the names of each country, the market plummeted, wiping off 3% in 4 minutes. The few remaining bulls were quickly liberated from their gains.

Starting point is 00:15:17 Trader Flowhorse reflected what much of Wall Street is feeling, commenting, I'm starting to get a bit worried that there are no pilots in the cabin. Bitcoin also plummeted as the tariffs were revealed, losing 6.5% in two hours. Gold surged on the news, gaining two percentage points. Consultant Tyson-Broady commented, Bitcoin dived on the tariff announcement like everything else, not beating those three tech stocks in a trench code allegations. Some bitcoins, though, are taking the longer view.

Starting point is 00:15:41 Strike CEO, Jack Mahlers wrote, we're witnessing the unwind of the post-World War II economic era. Order. What's happening now is much bigger than tariffs. For nearly 80 years, the U.S. exported dollars while importing goods and debt. That system is failing. What's next? A move back to a neutral reserve currency. Got Bitcoin? Luke Groman wrote, low tariffs on the world's factories were part and parcel of the post-1971 structure of U.S. reserve status. Now that U.S. tariffs are no longer low, the next shoot a drop will be a change to the post-1971 structure of U.S.D. Reserve status. Commenting on China already throwing up capital controls, Kurt Barley tweeted, a non-sovereign security centralized immutable digital asset with

Starting point is 00:16:18 boundless cross-border rails that floats in value against all currencies might do well in a world where this type of economic state craft is increasingly frequent. Still for most people, Bitcoin is far from the biggest thing in their minds. I think to the extent that there is any middle of the road take that's actually useful, it comes from Balaji Shrinivasa, who wrote, this is nukeing every single supply chain that passes through the U.S. in any way, under the illusion that 45 years of deindustrialization can be fixed in one day of 45% tariffs. Countless low-margin businesses, including U.S. exporters, will be pushed into unprofitability. If you're a 98-year-old man who hasn't been working out since 1945, and you try benching 315 because you could do that 80 years ago, what happens?

Starting point is 00:16:57 They're restoring a single parameter to 20th century levels in the hope of restoring the 20th century. But it doesn't work like that. IBM can set their prices to 1945 levels without recovering the dominance in 1945. Tariffs aren't time machines. As of recording, the market continues to puk on this news with the S&P 500 down 4.45%, and the NASDAQ down 5.4%. And ultimately, right now, all we can do is wait. We will soon have a better idea of whether this marks the final nail in the coffin of the Bretton Woods Agreement and the start of a new global order, or just a momentary policy that backfires immediately and is quickly walked back. We know for sure that Trump wants to use the blunt instrument of tariffs to rebalance global trade. The next question to find out is whether he's willing to push the world into a recession or even a depression to do it. However, it works out it is going to be very difficult to put the toothpaste back in the tube. What's clear is that the system we have today is very different than the system we had yesterday.

Starting point is 00:17:49 And so, I guess, happy liberation day. Anyways, guys, that is going to be where we wrap. We will obviously keep an eye on this story. Feel free to tweet at me, sober, thoughtful takes on all sides, as there are a few and far between. For now, though, that is going to do it for the breakdown. Appreciate you listening, as always. And until next time, be safe and take care of each other. Peace.

The Breakdown - Trump's Tariff Trouble

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.