The markets just don’t believe Trump on tariffs

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Good morning. Tesla stock fell nearly 7 per cent yesterday after Elon Musk announced over the weekend that he will start a new US political party. The carmaker’s investors have demonstrated, quite clearly, that they are tired of the billionaire’s political antics. Musk either doesn’t care or just can’t stay away. Email us psychological theories: [email protected]. 

Ninety deals in 90, no wait, 113 days, and we’re serious this time

The deadline, to absolutely no one’s surprise, was no deadline at all. Countries were meant to negotiate a trade deal with the US by tomorrow, or face the reciprocal tariffs at a level detailed on that famous bit of poster board back in April. Now the big day has been moved back to August first. Or it might be: Treasury secretary Scott Bessent, whose main job is turning pronouncements into policy, often mentions September first. Like the president himself, the administration’s deadlines have to be taken seriously but not literally. “Seriously” because if Trump should decide to enforce a deadline, the impact could be seismic. “Not literally” because he probably won’t. 

What will the next three and a half weeks (and probably more) be like? We got a taste of that today, when the president announced Japan and South Korea would face 25 per cent tariffs as of the first of the month, subject to change “depending on our relationship with your Country”. This sounds scary. The pair are the US’s biggest trading partners after Canada, Mexico and the EU. They made up nearly 9 per cent of US imports and 7 per cent of US exports in 2024. 

But the market, rather than panicking, gave the equivalent of a depressed shrug. The S&P 500, already in a declining pattern when the announcement hit, fell another fifth of a per cent. The dollar strengthened 0.7 per cent against the Korean won and one per cent against the yen. In Tokyo and Seoul, equities opened on an upswing: the Korean Kospi index rose over 1.4 per cent in the first few two hours of trading, while the Japanese Nikkei 225 index rose by a more restrained 0.4 per cent. The modest moves are perfectly rational. For one, the new rates would not increase the effective tariff rate on either country very much. Paul Ashworth of Capital Economics explained in a note to clients that the new rates  

don’t apply to goods subject to Trump’s product-specific tariffs, with autos accounting for 34 per cent of imports from both countries, which are already subject to a 25 per cent levy that Trump has more than once threatened to raise to 50 per cent. Add in exempt electronics and pharmaceuticals and . . . if Trump follows through on his threat, the overall effective tariff rate on US imports would rise from 15.5 per cent to 16.6 per cent.

And why would markets panic about any administration pronouncement at this point? Even the agreements that have been made appear wide open to further negotiation. As Liz Ann Sonders of Charles Schwab put it to us, for the most part, they “are frameworks, not trade agreements”. Trade deals have historically taken 18 months to sign bilaterally, and another 40 to 45 months to implement, she points out. The rare earth exports “deal” with China was really just a de-escalation — the Trump administration has not released any details of the agreement, and China is still withholding exports to US companies, according to the Wall Street Journal. 

The China negotiations are admittedly a special case. The deals with the UK and Vietnam might tell us more about what other countries can hope for. But, again, the US-UK agreement was just a framework. It lowered the levies on British carmakers and exempted aerospace products from tariffs, in exchange for more beef, ethanol and industrial imports. Our colleague Alan Beattie deflated it as follows:

Politically, you can see why a relatively small open economy with military and security dependencies on the US would take a chance on a legally nonbinding agreement, and trade off some smallish beef and bioethanol quotas for protecting its niche but politically salient car and steel exporters.

There is a signal in the agreement, though. The US had a trade surplus with the UK last year, and yet the agreement did not remove the 10 per cent universal tariff. So other countries should expect the floor doesn’t go below 10 per cent.  

The recent agreement with Vietnam is the closest thing we have to a “proper” deal: a straight 20 per cent tariff on Vietnamese exports, no duties on US exports, and a 40 per cent rate on transshipped goods, meant to target China. The caveat is that the Vietnamese economy is very different from those of South Korea and Japan. It is smaller and poorer, and only imported $13bn of US goods last year. By contrast, South Korea and Japan are richer and accounted for a greater share of US exports; the sum for each country alone is more than five times that of Vietnam. That, and the important US military alliances with each country, gives these countries a stronger negotiating position. 

The tariff game, in short, is still — somehow — in its preliminaries. It begins in earnest only when agreements are made with large trade partners that the market believes will persist; the market responds to those agreements; and the president responds to the market’s response. It has long been the thesis of this newsletter that Trump will back down from any tariffs that evoke a sustained negative response from the markets. Only when the markets have been convinced that a given deal is set to stick are they going to force the issue with him. We remain a long way from there. 

The US stock and bond markets seem to have reached the conclusion that moderate tariffs — 10 per cent on all trading partners, a bit more on China and a few specific sectors — won’t matter much to economic growth or profits, or they will be softened if they do. And they have simply ignored Trump’s ongoing threats of more severe tariffs. The big question, then, is whether investors have set themselves up for a big disappointment when Trump — emboldened by the markets’ indifference and the economy’s resilience — suddenly shows resolve. 

Sonders of Charles Schwab wonders if in addition to the Trump put (also known as the Taco trade) there might also be a “Trump call”: 

With the market having done as well as it has since April 9, with economic data and inflation data perhaps not yet showing the full effect of tariffs, but not imploding to any degree . . . Is that the set-up for the administration’s willingness to just continue to press things from a tariff perspective?

We think this is worth worrying about.

One Good Read

A “cheap button” for Russia to press.