Trump's economic embargo of the United States
Plus, German bonds and military Keynesianism
What protection teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war.
Henry George, Protection or Free Trade (1886).
President Trump proceeded with the imposition of tariffs against Canada and Mexico this week, with a one month stay for the automotive sector and a subsequently announced carve out for USMCA compliant goods. But as one Canadian auto exec was quoted as saying:
‘No one can operate under 30-day threat cycles, including especially American businesses. Evidence of this is the fact that it was American businesses who requested this reprieve, not Canada or Mexico.’
Canada retaliated with tariffs on USD 107 billion of US imports, starting with USD 21 billon immediately.
Trump also lifted tariffs on China by another 10%. China retaliated with an additional 15% tariff on US chicken, wheat, corn and cotton and an extra 10% levy on U.S. soybeans, sorghum, pork, beef, aquatic products, fruits and vegetables and dairy imports effective from 10 March. More than 25 US firms were also variously sanctioned. The 25% tariffs on the EU, chips, steel and aluminum are still to come, as well as reciprocal tariffs that could cover almost any good from anywhere in the world, creating thousands of separate tariff lines.
Even before any foreign retaliation, the announced tariffs are expected to shrink US GDP by nearly 0.3% and after-tax incomes by 0.7% on average, based on PIIE calculations. The impact on household incomes will more than wipe out any gains from the extension of the TCJA tax cuts:
Extinguishing the Trump trade
The trade war has all but extinguished what was left of the Trump trade, with USD assets having mostly given up their post-election change. The only real surprise in all this is the USD, which should be the most resilient leg of the Trump trade given the role of economic policy uncertainty and tariff offset in supporting the dollar. But the biggest increase in German bond yields since 1990 has seen a four sigma move in EUR-USD, while Japanese bond yields are making new 16-year highs, weighing on USD-JPY.