The Breakdown - Why the Trump Tariffs Aren't Actually Economic Policy

Episode Date: February 4, 2025

The Trump Tariffs broke absolutely everyone's mind this weekend. Most, frankly, didn't see the logic and even those with a pro-Tariff bent were surprised at the direction and scale of the move. NLW argues that the one thing that's for sure is that these weren't primarily economic moves; they were all about geostrategic realignment. Sponsored by: Ledger Ledger, the world leader in digital asset security, proudly sponsors The Breakdown podcast. Celebrating 10 years of protecting over 20% of the world’s crypto, Ledger ensures the security of your assets. For the best self-custody solution in the space, buy a LEDGER™ device and secure your crypto today.Buy now on Ledger.com. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

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 Monday, February 3rd, and today, you better believe we are talking tariffs. 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 in the show notes or go to bit.L.Y. All right, friends, well, unless you have absolutely had your head all the way in the sand, you will know that we got an economic A-bomb this weekend as Donald Trump followed through on his

promise to drop tariffs. The tariffs were big. They were pointed not just at competitive countries like China, but at key allies like Canada and Mexico. And they basically had the entire world debating whether this was the single most boneheaded move ever. The Wall Street Journal called it something like the stupidest trade war ever, or whether there was some 5D chess going on. For the purposes of this episode, we're going to try to do our best to do something that effectively no other media outlet seems to want to do, which is actually look at this, at least from a starting objective point, although that's hard for people, to understand what the hell is going on. Can't promise we'll get there, but I do think by the end of this,

you will at least have a much better sense of the spectrum of takes around it, and hopefully your personal opinion, whatever it may be, will at least have the context of all those other people as well. So, as I said, on Saturday, Donald Trump shocked the world, although many think we shouldn't have been shocked because he was just doing exactly what he said he was going to do, by introducing his first round of tariffs. All imports from Canada and Mexico will face 25% tariffs, while Chinese goods will be hit with an additional 10% tariff. The measures go into effect at one minute past midnight on Tuesday, giving very little time for last-minute negotiations. Retaliation has already been threatened with both Canada and Mexico pledging to place a 25% tariff on U.S. goods. China has said they will file a complete.

complaint with the World Trade Organization and pledged to, quote, take corresponding countermeasures, although at this stage Beijing hasn't articulated what they would be. On Sunday, Trump pledged that more would come, stating that he will, quote, definitely place tariffs on the EU. He said that there isn't a timeline, but that it will happen, quote, pretty soon. And so with the stroke of a pen over the weekend, Donald Trump upended the global free trade system. Highlighting how big this changes, Carl built the co-chair of the European Council on Foreign Relations wrote, we now have what is in effect all-out economic war between the U.S. and Canada, a country that has historically been closer to it than any other. This is insane, but more will come. It's America against everyone. Gary Ing, senior

economist at the Texas SA, said, it marks a new phase of the trade war which targets multiple countries, including allies in China, to meet U.S. economic and geopolitical policy goals. To put it in perspective, the U.S. average trade-weighted tariff is expected to rise to 10% from 2%. And to find anything remotely comparable, you have to go back to the Smoot-Hawley tariffs imposed in 1930. Much of the focus over the weekend has been on how the tariffs would affect the U.S. economy, specifically around whether it would drive another surge of inflation. The Yale Budge Lab has estimated that the average U.S. household will see a reduction in

annual purchasing power of between $1,200. The impacts are even more acute for individual industries. Canadian energy exports will be levied to reduce 10% tariff, but lumber will fuel the full brunt. South of the border, tequila and avocados are some of the obvious products that will be hit hard, but Canada and Mexico represent a quarter of U.S. imports combined, so the impact will be widespread. spread. Another critical industry at risk is automakers. Current supply chains for cars involve parts being sourced globally with inputs often crossing North American borders multiple times during manufacturing. This includes American companies like Ford and GM. Flavio Volpe, president of Canada's automotive

parts manufacturers association, said, the auto sector is going to shut down within a week. 25% absolutely nobody in our business is profitable by a long shot. Bloomberg estimates that the average car price will increase by $3,000. However, there's a huge amount of debate over whether those costs can be passed on the consumers. It's also important to note that Chinese companies have used Mexico and Canada as a final assembly point to avoid tariffs. In addition to the tariffs, Trump is also closing the de minimis exception in import taxes. This means that individual packages of consumer goods will now be processed through customs, closing a loophole used by Timu, Shine, and even Amazon. Now, there is, of course, a lot of back and forth on whether tariffs will show up as inflation.

Anthony Pomliano made the argument that tariffs aren't inflationary in the literal sense because they represent a one-time price adjustment. He noted that Norwell, imposes a 25% sales tax on most imported goods and maintains low inflation. Now, of course, even if you accept that, it ignores the fact that a one-time price adjustment would still be extremely painful for households. The other argument is that tariffs are absorbed by currency fluctuations rather than price adjustments on goods. Both the Canadian dollar and Mexican peso fell sharply over the weekend, but by less than 3%. The Canadian dollar is already at an all-time low, and so the idea of absorbing a 25% tariff through currency devaluation doesn't seem

super possible without major economic problems following close behind. Still, the dollar is strengthening dramatically on the news, and it's worth keeping an eye out for second order effects globally. Overall, as you might imagine, and you've probably experienced, generally the most dominant take is skepticism that this makes any sort of sense, whatever. Bucco Capital wrote, any good content on how these tariffs aren't effing stupid? Real question, would appreciate any reads this being good strategy. Everything I've read so far is just, this guy is an effing idiot and nothing in any field says this is a good idea, so hoping to hear the other side.

By the end of the weekend, he added, this threat is so funny to wake up to because it's just Twitter account sharing why tariffs could be good and no articles or analysis from real qualified people. Sounds like we have our answer. I don't know if we have our answer on that front. However, I do think that looking at this simply as an economic policy would be a mistake. This is diplomatic policy, and there is clearly a much larger geopolitical game being played here. On the campaign trail, Trump and his economic advisors made it clear that tariffs would be deployed as a strategic tool to reshape the global trade system. Treasury Secretary Scott Besson discussed tariffs at length over recent years. In a 2024 note to investors, he wrote,

tariffs are inflationary and would strengthen the dollar, hardly a good starting point for a U.S. Industrial Renaissance. A tariff gun will always be loaded and on the table but rarely discharged. He changed his view somewhat as the election loomed, stating, tariffs can't be inflationary because of the price of one thing goes up unless you give people more money, then they have less to spend on the other thing, so there is no inflation. Still, as I said, I think that the inflation argument,

while not insignificant, is really a red herring for the core thing that we need to be looking at here. And indeed, more important were Besson's views on reshaping global trade. In an appearance last June, he said, we are going to have some kind of a grand global economic reordering in international trade and relationships. I'd like to be a part of it. Even farther back at the beginning of last year, he commented, what we're trying to do is make China rebalance. This is a 10-year project.

One interesting observation about Besson's strategy is that tariffs will make it more expensive to reshor as they drive the dollar higher. The order of operations matters and going too hard too early could be counterproductive for that part of the agenda. And indeed, we'll come back to this, but one of the things that I found extremely notable is that if you go through and try to find people who support the idea of tariffs as a strategic tool, which frankly isn't a particularly common opinion, none of them were advocating any sort of thing like this. In fact, many of them were saying, of course it won't be like this because that would be insane. And again, these are the people who think that tariffs are an interest in strategic tool. And so indeed the jarring part of this is this broad-based 25% tariff thing, as well as the fact that they're on Canada and Mexico, but we'll get to that too. In any case, both Besson and Steve Meirin, the chair of Trump's Council of Economic Advisors, have advocated for a slow and steady approach to ramping up tariffs.

Mirren's preferred plan was to introduce tariffs at between 2 and 5% and increase them each month. The goal was to give businesses a predictable environment that would encourage reshoring over time. I saw another argument for announcing huge tariffs, but two years out, again, giving people time to adjust. Reporting on Muren's plan from early January, claimed that it hadn't yet been presented to President Trump, which could suggest that the president is going a little off script. On the other hand, Trump might have felt it important to maintain credibility on tariffs and follow through on his earlier threats. These tariffs have been on the table for months, but very few people seem to take the threat

seriously until this weekend. 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 digital ownership more secure and accessible. You can buy your Bitcoin with Ledger and Ledger Live,

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At least when it comes to the stated goal, Trump has been very clear, even if the clarity has people scratching their heads. Just weeks after the election, Trump threatened these exact tariffs against Canada, Mexico, and China if they failed to halt the cross-border fentanyl trade. The Saturday announcement was equally clear, with Trump stating this was done, quote, because of the major threat of illegal aliens and deadly drugs killing our citizens, including fentanyl. I made a promise on my campaign to stop the flood of illegal aliens and drugs from pouring across our borders, and Americans overwhelmingly voted in favor of it. Obviously, the framing here is important, indicating the president believes he has a strong mandate on these issues. Further, it suggests that these tariffs are not primarily

about economic and trade issues, or at least not solely about them, but are being used to achieve other strategic goals. As an interesting side note, the president can only impose tariffs based on national security concerns, otherwise they must be approved by Congress. Explaining them with border concerns could make the tariffs more legally defensible at the Supreme Court level. However, to the extent that fentanyl is the stated goal, there appears to be an entirely separate agenda being revealed over on truth social. On his network, Trump posted, anybody that's against tariffs, including the fake news, Wall Street Journal, and hedge funds is only against them because these people or entities are controlled by China.

Anybody that loves and believes in the United States of America is in favor of tariffs. They should have never ended in favor of the income tax system in 1913. The response to tariffs has been fantastic. I think then we have to take seriously the possibility that Trump wants to follow through with promises to replace income tax with tariffs, and he also renewed his calls for Canada to become the 51st state. The logic, to the extent you want to call it that, is that the U.S. subsidizes Canada to the tune of hundreds of billions of dollars,

and that, quote, without this massive subsidy, Canada ceases to exist as a viable country. Trump added that a Canadian state would have, quote, much lower taxes and far better military protection for the people of Canada and no tariffs. The whole taxes discussion also is integrated with the reshoring idea. In comments to the global community assembled at Davos last week, Trump said, My message to every business in the world is to come make your product in America and I will give you the lowest taxes on earth. If you don't make your product in America, which is your prerogative, then you will have to pay a tariff which will direct trillions of dollars into our treasury to strengthen our economy and pay down debt. Indeed, the debt piece is a whole separate part of the conversation. Obviously, a lot of folks around Trump, including Elon Musk, are very concerned about the national debt, and so that has a stake in this

conversation as well. In a very real way, then, Trump seems to be thinking of tariffs as a multipurpose tool to solve all of America's problems. It's not clear which goal he is most specifically attempting to achieve with this first round of tariffs, but he does seem to have it set in his mind that tariffs can solve the drug crisis, the debt crisis, rebalance global trade, and lower taxes. And so, with Trump resenting tariffs as a panacea, for the U.S. is anyone actually taking this view seriously? And I would like to stress at this point that the vast majority of people are not, and that the reason that I am showing you the other side is that the other side is so few and far between to come by. But for the sake of the balanced perspective,

again, the vast majority of people think that this is a totally insane move. And that includes people who supported Trump. All right, that out of the way, let's come back to this question of who is taking this view seriously. In November, Michael Every, the global strategist at Rabobank, produced a comprehensive research paper on Trump's geopolitical views, entitled Macro Strategy versus Grand Macro Strategy. The entire paper is worth reading to form an understanding of the goals and the available tools, but the key insight is that geopolitical conflict is fought along three categories, economic statecraft, political statecraft, and military statecraft. Every's thesis is that between the end of World War II and the end of the Cold War, the U.S. shelved the tools of economic

statecraft in favor of the other two limbs. Every believes the Trump administration is now renewing the use of economic statecraft to achieve its grand national strategy. Or to put another way to make America great again, whatever that means to Trump. In an interview following the election, he said, this is a game of chess being played. The only thing that changed with the Trump election is a recognition it's a game of chess rather than thinking its checkers, and a recognition that you can use all the pieces. Now, hints of this view are beginning to percolate into mainstream consciousness. Last week at Davos, JP Morgan CEO, Jamie Diamond was asked about the impact of tariffs and responded, they're an economic tool, that's it. They're an economic weapon. People argue,

is it inflationary or not inflationary? I would put it in perspective. If it's a little bit inflationary, but it's good for national security, so be it. Get over it. National security trumps a little bit more inflation. And while many still cannot see these tariffs as anything but random destruction from a narcissistic president, it is a stated goal of this administration to effectively break the global free trade system. Economist Alex Kruger tweeted, there's a well-known negotiation strategy sometimes called the madman theory used by Nixon during the Cold War. The idea is that if your opponent believes you are irrational or unpredictable, perhaps even capable of extreme actions, they may be more likely to concede to your demands out of fear that you might do something reckless.

We'll come back at the end to discuss what evidence we have that the tariffs are actually bringing people to the negotiating table. It's important to make a point, I think, for completeness, that these tariffs are, again, against allies. This makes no sense to Senator Mitch McConnell, who told 60 minutes on Sunday, quote, tariffs will drive the cost of everything up. In other words, it will be paid for by American consumers. I mean, why would you want to get into a fight with our allies over this? Part of the logic, of course, could be to force Canada and Mexico to the negotiation table, apart from border issues, Trump could be looking for changes in the way that they act as a pass-through for Chinese goods and capital flows, and the bigger picture could also be about tightening up the terms

of the U.S. During the Russian sanctions, many nations were willing to thumb their nose at the U.S. and continue importing Russian oil. Measures against China would have similar issues if the rules of the road weren't spelled out to allies well in advance. Johns Hopkins professor S. Fundyar of Batmanjelage said, if there's any geopolitical logic in the Trump tariffs, this is it. To sustain the fleeting unipolar order and keep America first, the U.S. doesn't need to confront adversaries, it needs to coerce allies. Trump is testing how economic coercion can make allies obey.

Entrepreneur Arnard Bertrand commented, This is the U.S. effectively saying, Our attempt at running the world is over to each his own. We're now just another great power, not the indispensable nation. It looks dumb, as the Wall Street Journal wrote, if you're still mentally in the old paradigm, but it's always a mistake to think that what the U.S. or any other country does is dumb. Higemone was going to end sooner or later,

and now the U.S. is basically choosing to end it on its own terms. It is the post-American world order brought to you by, America itself. Even the tariffs on allies viewed under this angle makes sense, as it redefines the concept of allies. They don't want or maybe rather can't afford vassals anymore, but rather relationships that evolve based on current interests. You can either view it as decline because it does unquestionably look like the end of the American Empire, or as avoiding further decline, controlled withdrawal from imperial commitments in order to focus resources on core national interests, rather than being forced into an even messier retreat at a later stage. In any case, it is the end

Vanera. And while the Trump administration looks like chaos to many observers, they're probably much more attuned to the changing realities of the world and their own country's predicament than their predecessors. Acknowledging the existence of a multipolar world and choosing to operate within it, rather than trying to maintain an increasingly costly global hegemony, couldn't be delayed much further. It looks messy, but it's probably better than maintaining the fiction of American primacy until it eventually collapses under its own weight. All in all, this transformation may mark one of the most significant shifts in international relations since the fall of the Soviet Union. and those most unprepared for it, as is already painfully obvious, are America's vassals caught

completely flat-footed by the realization that the patron they've relied on for decades is now treating them as just another set of countries to negotiate with. Brent Johnson agreed that this is the end of empire, but not the end of hegemonic power. He commented, multipolarity of equals does not yet exist, and multipolarity does not mean there is still a hegemonic power. The dismantling of certain institutions will make the U.S. rise versus the other polls, not fall versus the other polls. If you think the goal is otherwise, you are massively misreading Trump, Vance Rubio, at all. One thing that's very clear is that it's impossible to understand the tariffs through the lens of the rules-based order.

Following the end of the Cold War, free and unconditional trade was the priority of every U.S. administration. The world also existed in relative peace with no direct conflict between major powers. Basebef Jaisos, however, one of the leading voices in the tech acceleration movement posted, I'm going to say the quiet part out loud. Tariffs are necessary to focus the economy on reshoring the American industry base in preparation for a hot war in the coming years. At least I believe this is the latent thesis. Whether tariffs are the best way to achieve this is up for debate.

debate. There is, however, another possible explanation that Trump simply loves tariffs. In the notorious 1990 interview with Playboy where he first discussed his political ambitions, Trump said the first thing he would do as president was, quote, a toughness of attitude would prevail. I'd throw attacks on every Mercedes-Benz rolling into this country and on all Japanese products and we'd have wonderful allies again. Stanford Professor Orrin Kure commented, it may be dumb, but the idea of slapping new tariffs on your political allies isn't a new idea for him. It's one of his longest-standing political beliefs. Dirty Texas hedge commented, the basic outline of Trump 2.0 foreign policy seems to be, if you want U.S. military protection, then you have to be an obedient imperial subject. Now, lastly, this being a Bitcoin

show and all, although it's pretty clear that the geopolitical implications are more important in the long term, you would have also noticed that the tariffs are apparently bad for Bitcoin and dismal for the long tail of speculative all coins. Analyst Will Clemente commented, Damn, I just realized that was the biggest liquidation event in the history of crypto. stocks are also looking pretty negative with the S&P 500 down more than 2% from Friday's close. At this stage, it's difficult to make much of the price action other than the market's hate uncertainty, and Trump policy is nothing if not uncertain. Steve Englander, the global head of FX at Standard Chartered said,

he seems to be like a poker player who's betting his whole stash on the first hand. The market just wasn't prepared for it. Jeff Park, the head of Alpha Strategies, put together a long thesis on why this foreign policy is ultimately good for Bitcoin. He believes this is the opening stages of a process that will ultimately lead to an agreement on devaluing the dollar. A Plaza Accord 2.0. Park believes the goal is to lower the dollar and lower long-term bond yields at the same time. There's a lot of steps before that can be achieved, but forcing nations to negotiate as a part of the

process. Park wrote, the asset to own, therefore, is Bitcoin. In a world of weaker dollar and weaker U.S. rates, something broken pundits will tell you is impossible. Risk assets in the U.S. will fly through the roof beyond your wildest imagination, for it is likely a giant tax cut will have to accompany the higher cost borne by the loss of comparative advantage. Tariff costs, most likely through higher inflation will be shared by both the U.S. and trade partners, but the relative impact will be much heavier on foreigners. These countries will then have to find a way to fend off their weak growth issues, leading to stimulating the economy through monetary and fiscal policies that ultimately cause currency debasement. The outraged citizens of these countries will experience a mini-financial crisis and look

for alternatives. And unlike the 1970s, when the world was largely offline, today we are not only online, we are on chain. So while both sides of the trade imbalance equation will want Bitcoin for two different reasons, the end result is the same. Higher, violently faster, for we are at war. Bitcoiners are always good at whatever happens it's good for Bitcoin, but this has got to be one of the best whatever happens it's good for Bitcoin arguments I've ever seen. So let's come back to what happens next. Is this all a faint to bring people to the negotiation table? For some, it's hard to see the logic, given that Trump has expressed no particular demands. But late last night, the Wall Street Journal reported that Chinese officials will begin negotiations immediately. Opening terms include a pledge not to devalue the yuan, offering more investments in the U.S. and reinstating the phase one trade deal from Trump's previous term.

Then right before I went to record, Trump posted on Truth Social, I just spoke with President Claudia Scheinbaum of Mexico. It was a very friendly conversation wherein she agreed to immediately supply 10,000 Mexican soldiers on the border separating Mexico and the United States. These soldiers will be specifically designated to stop the flow of fentanyl and illegal migrants into our country. We further agreed to immediately pause the anticipated tariffs for a one-month period, during which we will have negotiations headed by Secretary of State Marco Rubio, Secretary of Treasury Scott Besson, and Secretary of Commerce Howard Lutnik, and High-Level representatives of Mexico. I look forward to participating in those negotiations with President

Shinebaum as we attempt to achieve a quote-unquote deal between our two countries. So friends, do I have the answers? Absolutely not. Am I able to get over all of the instincts that say this seems crazy and just assume it's 5D chess? Once again, not yet. However, I do think that unless we endeavor to actually look at all the policies coming from this administration along the full spectrum of possibility from, on the one hand, this is raving unpredictable policy made by Twitter, to on the other hand, this is a global realignment 5D chess. It's going to be a very long four years. Hopefully this helps you sort through your own perspectives on all of this. Either way, I'm sure we'll be talking about it more. For now, that's going to do it for today's extra long version of the breakdown. Till next time,

be safe and take care of each other. Peace.