What’s next for Trump’s tariffs?

0:06Pushkin.

0:10The era of Trump 2.0 and his beloved trade tariffs is upon us. and hoo boy, it's quite the ride. So far, it has tangled up Colombia, Canada, Mexico, China. Maybe the EU and the UK are next. We'll see. Today on the show, join us for a game of what the hell is actually going on here and why do we care? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a slightly frazzled markets columnist here at FT Towers in London. and exciting times. I'm joined today in person by the alarmingly young and clever Aidan Reiter from the Unhedged Newsletter in New York.

0:51He's in London having briefly escaped the clutches of Rob Armstrong's reign of terror. Aidan, how are you doing? I'm great. It's great to be in London and away from towering imperious Rob. Yeah, yeah. I'm much smaller than him. I'm a lot less scary. So Aidan, one thing, you know, we like to do with this pod is like answer questions that people really want to know the answers to, but are too afraid to ask for fear of looking silly. There is no such thing as a silly question on this podcast. Absolutely. Heaven knows I've asked enough of them myself. So just briefly, what are trade tariffs? Why does Donald Trump like them so much?

1:27Well, unclear why he loves them so much because he's really obsessed with them and has been since the 80s. But a tariff is essentially a tax. Essentially, you're saying when a good or something comes into the United States or another country, there is going to be an extra duty on top of that good, whether that's 10 % or 20 % of the price. And it just fundamentally changes the price for whoever's importing or exporting it. It could make it more expensive than a domestic product. It could make it more in line with a domestic product. So the basic idea is you change the economics and the calculus for domestic firms about what they want to import versus export.

1:59Yeah. So if you want to import this stuff from China, it's going to cost you, there's already tariffs on China and there's going to be an extra 10 % on... Across the board, which is unprecedented, at least in the past 20 years of the US and China. And that means if you're a US consumer, effectively, you pay somewhat more. So this is something that confuses people. Who pays the tariffs? And it's case by case. Sometimes if there's enough margin and whoever is the US firm or foreign firm wants to keep their competitive advantage or their market share, they might choose to take on the cost of the tariff and not let it be reflected in the price.

2:34Most of the time, especially for low margin companies, low margin businesses, a lot of cheap goods, which is often what we get from China, that will be passed on to the consumer. Whether or not that's quote unquote inflation is a much bigger conversation we don't necessarily need to get into. But at the end of the day, somebody has to pay that tariff. Yeah. So it's not always necessarily the case that if you put a 25 % tariff on Mexican or Canadian goods, which was what Trump was saying earlier this week, that the consumer ends up paying 25 % more. Not always. It can get smoothed out. But the point is, broadly speaking, Canada and Mexico don't pay this.

3:09China doesn't pay this. The bill is footed in the US. It could be footed by a Chinese, Canadian or Mexican firm, but that's generally unlikely. And so the idea for Trump, like you say, he's been talking about tariffs since the 80s. This is something he's loved for, I think, longer than you've been alive. Far longer. Don't rub it. And the idea is if you make it more expensive to import stuff, then U.S. manufacturing will catch up and you'll make these things yourself and you will make America great again by renewing your exporting industry and your domestic consumption industry. To a lot of people in the United States, and there's definitely some good arguments for and against this view, when free trade was promulgated and NAFTA was put in and WTO was more standardized.

3:55All these big trade bodies. These big trade bodies and big trade agreements were put in place. That resulted in a lot of manufacturing going to places where it was cheaper to do that. The U.S. is a more developed economy with higher living standards. It's more expensive to pay people. It's also we have higher costs of doing many things in the U.S. for good reasons and for bad reasons. So in Donald Trump's worldview and many people's worldview, we need to reset the clock. We need to change the calculus so that manufacturing is not always flowing away from the United States. It's flowing back to the United States.

4:23Now, the tricky thing here, and I don't want to get too deep in the weeds, is those things called supply chains, right? Yes. Say you want all car manufacturing for Americans to be done in America. There's a lot of like nuts and bolts and widgets and bits of car seats and this and that that are going to come from Canada. They're going to come from Mexico. So there is very little manufacturing of stuff like that that you can do entirely at home. You're very reliant on these complex webs of relationships between different countries. So slapping taxes on this stuff sounds complicated. Complicated.

4:55It's disruptive. You know, we've already created these systems, right? One might endeavor to reform them as opposed to completely end them and sever them. These supply chains already exist. A lot of money has gone into making them. So there are some in the Democratic Party and other camps who think this gets rid of the quote unquote comparative advantage that certain economies have and whether they can make certain goods more efficiently. It's a big meaty topic. But at the end of the day, it's disruptive to put these tariffs in place. Donald Trump, from the first time he rolled off that golden escalator in 2015, he's been lamenting trade deficits.

5:26So it's not necessarily that the U.S. imports from other places. It's that it is so uneven that China exports a ton of goods to us and we only export some goods to them. Yeah. What's interesting about Trump's approach so far is that China, not Canada or Mexico, is the place where we have the larger trade deficit. Imports from Canada and Mexico are higher than they are from China. is because our supply chains as neighbors are so intensely integrated. But China, there was actually much more of an imbalance. So it was very surprising to many pundits, especially because China and tariffs on China were a big part of his campaign promises that the first focus was not China.

6:01It was 10 % on China. It was 25 % on Canada and Mexico, who are our allies, who have gone to war with us. It was all very confusing. Yeah, yeah. So the choice of targets for tariffs is quite weird. So, yeah, let's just go back to the long ago distant days of the weekend. It's Tuesday as we're recording this, listeners. What did he say he was going to do? So it was 25 % on Canada, 25 % on Mexico. This is like a total stink bomb, right? Because no one saw this coming because, again, friends and allies. Yeah, I mean, you know, it's shocking the market didn't see it coming because on his first day in office, at the end of the day, he did say, I'm thinking by February 1st, we'll put 25 % on Canada and Mexico.

6:42Just nobody thought he would go through with it, even though so much of his campaign rhetoric was about tariffs. And again, it's come back to the point that Canada and Mexico were not seen as the first targets of this onslaught. Everybody thought he would call it off by Friday. It was known that Trudeau had called him and there were negotiations between the Canadian prime minister. Apparently, I've heard reports that was trying to talk to him. Claudia Scheinbaum, the Mexican president, had very publicly pushed against him, unclear what was going on behind the scenes. So it wasn't clear if that was actually going to go through.

7:13And then over the weekend, he was like, no, it's going through. We're doing this. We're really going to do this thing. So that is interesting because let's look at what the markets did, right? There was, you know, certainly if you looked at social media over the weekend, it was saying, you know, geez, markets aren't going to like this very much. They're going to really fall out of bed. They kind of, you know, rolled over in bed, but they didn't fall out of bed. So we saw, so Chinese markets were shut, which is kind of reasonably important to note here. But there was a bit of a sell-off in Asia stocks.

7:44There was a decent sell-off in Europe because in Europe investors are thinking, huh, we could be next for this treatment. There was a little bit of a wobble in US stocks and the dollar picked up a little bit. Donald Trump tends to like a weaker dollar, so he doesn't like the dollar strengthening. So these are all... Well, he's of two minds. We cannot go into the many, many folds of his brain. Let's not flood the zone here. But my point is, like, U.S. stocks fell. I think they opened about 1.4 % lower. That is lame. That is nowhere near enough. You know, everyone talks about, well, the big kind of controlling factor on Donald Trump is the stock vigilantes.

8:22And he's not going to want to do anything that upsets markets. I hope you like my little... That was quite an impressionation. My pundit voice there. But the stock vigilantes are asleep at the wheel, right? If you want to get him to really change direction, you need markets to fall a lot more than that. Yeah. I mean, it could have been reflecting two things. It could have been reflecting that the market really never thought this was going to go through, even when over the weekend he said it would. They still never believed him. It turns out they were right. They were right. He backtracked. It also could have been the market potentially underpricing and underappreciating just how integral Canada and Mexico are to many of our supply chains and many of our goods.

8:59So just looking very high level at the numbers, we get 23 % of our oil from Canada that we actually consume. That's 55 % of all of our oil imports. And while the U.S. has a lot of shale, it's a different grade of oil that we get from Canada. And we have a ton of pipelines that already pump that out. And that's already a lot of money in the ground and refineries that have already been tooled for that extra grade crude, right, that heavy stuff. Didn't his initial 25 % suggestion exclude that stuff, though? 10 % as opposed to 25%. So the first time he announced it, it was 25 % on everything. It seems the Trump administration got wind that the oil industry would not be very happy with him.

9:34And that was just brought down to 10%. But still, we get so much of our stuff from Canada and so much of our energy from Canada. And while that was 10%, as we wrote in the newsletter yesterday, it's still pretty high. That's a lot. I mean, it's a lot. And it could really fundamentally reshape U.S. oil markets and U.S. energy markets. For Mexico, we get 16 % of our imports from Mexico. That's more imports than we get from Canada. And 35 % of our automobiles. right and those are integrated supply chains across the u.s canada china and crucially mexico right and you'd think that you know ford and gm and these big stocks would fall off and they did have a pretty big drop in the morning but they pared back later in the day yeah that's the thing right this restraining factor that comes from the markets does not appear to be there now again that could be because investors are saying i don't believe you or it could be that investors are really bad at reading what he's going to do next it could be a combination of these things but the The stabilizers are not there, right?

10:26Markets are not there. This idea that, well, he's appointed Scott Besson as Treasury Secretary. He's an adult in the room. Don't worry. He won't let anything too wild happen. It looks like his influence is pretty limited at this stage. Unclear. I mean, we have no idea what's going on behind the scenes there. What we can say, and Unhedge Newsletter has written a couple times about who's behind the scenes of the Trump econ policy. Bessent is very for a gradual approach, right? We're going to give them, well, good advance. We're going to roll these out sequentially. We're not just going to hit the entire world with tariffs, which was originally a campaign proposal.

10:59It's unclear if he influenced him. That being said, I mean, 25 % tariffs on Canada and Mexico, while big and alarming, with a week notice is probably more than we expected from Trump on day one based on his rhetoric. So even this could have been showing restraint and that could be Besson's influence. Who knows? Who knows? The counterfactual is always impossible to prove. But what we can prove is he said over the weekend, I'm absolutely serious about this. This was supposed to kick in sort of at some point this week. and then a few phone calls happen and he's like, actually, I've changed my mind.

11:30There's going to be a delay, at least, with Mexico and Canada. He's sticking to China, though. Yeah, so it's a one-month delay on Canada and Mexico while they renegotiate terms. And this aligns with what many feel to be the negotiation tactic of tariffs, right? Some people question whether tariffs were an aim in and of itself. A lot of people think, in the case of China, they are, right? We need to fix this trade deficit. A lot of people think they're just a point of negotiation. And I think that Canada, Mexico, and also Colombia last week show that Trump is using them for negotiations. On stuff that has nothing to do with trade, this is one of the things I think that investors find it so difficult to get around.

12:04Because if they could just look at a series of trade balances on an Excel spreadsheet, they could say, OK, this country, this country, this country are the most at risk of tariffs from the US. But actually, he's looking not necessarily at trade balances. He's looking at what help are you giving us with the border, whether that's the border with Canada or the border with Mexico. He's looking at stuff like the flow of fentanyl in and out of the country. And it's arguable if it has anything to do with the flow of fentanyl or making the border more secure, right? It could all be, you know, stunting, not actually putting troops there.

12:32Who knows? We haven't seen yet. Yeah. Yeah, it's very hard for the market to read when it's unclear what his actual aims are at the end of the day. Yeah. Again, to your point, if it were just about trade deficits, we would have known he would have gone for China. And we would have known that he'd go hard on China. But even with China, it's unclear if this is about negotiations. Yeah. Reading into previous Republican talking points and papers on this, it seems they didn't find 2018 and 2019 tariff negotiations with China to be particularly fruitful. So it seems that in the case of China, it's a means in and of itself.

13:02But China's hit back on the United States today wasn't completely crushing. And it would seem that they're just trying to react by not poking the bear, but also setting the stage for some negotiation. Right. I mean, that's a bit of speculation. Yeah. But they essentially, China hit back with 15 % tariffs on U.S. coal exports, 15 % on U.S. LNG exports. And then I believe it was 10 % on U.S. oil exports. Now, remember that from China, we get a lot, a lot of goods. It's less than Canada and Mexico, but we have a larger trade deficit. And part of that is electronics, which are$220 billion. And that's anything from like a TV to a washer dryer.

13:36You Americans can't live without your TVs. Can the Brits? I mean, you have to pay for a license here. I guess that means you can live without it. But, you know, while these are more targeted and seem to be designed to not hurt the Chinese economy, they shouldn't be completely overlooked in the case of the U.S. Yes, to a large extent, the U.S. can boss the rest of the world around. But there are limits here. You know, these are other sovereign nations with tools at their disposal. Now, speaking of which, the thing that Donald Trump has said would make the whole discussion about Canadian tariffs go away is, well, Canada should join the U.S., which...

14:10I don't think he wants that. I mean, how many electoral college votes would it get? Canada has roughly the population of the U.S.'s most populous state, California. That would be 28 electoral college votes. And they probably wouldn't go for Trump. I don't think the Republicans actually want this. Also, plus two senators. Anyway, there's no world in which Canada is joining the U.S. This is not going to happen, but it would be really good trolling if they did from that point of view. I don't want to reward that trolling. No, no. Okay, let's park that idea. But so, yeah, in addition to the extra levies that China has imposed on imports from the US, they've also taken some quite interesting tacks in terms of they've renewed antitrust investigations involving NVIDIA and Google.

14:50Where these will go, I don't know, but it's sand in the gears. And as you say, it's like a signal that, OK, but we're not going to take this lying down. We don't have like no power here. And the other thing that the Chinese have always got in their back pocket is the currency. Oh, yeah. They can weaken that thing. Yeah. I mean, it's largely expected by China analysts that they will allow it to slip past its current band of about, you know, the bottom threshold is eight yuan to the US dollar, eight renminbi. If they do that, right, it allows their exports to continue being competitive, even with tariffs in place.

15:22The question is, that would probably invite much more retaliation from Donald Trump and potentially even some allies. On the China question, Donald Trump seems to have support, right? Other countries are frustrated with China's overcapacity. It is worth mentioning, right, Trump brought in a bunch of tariffs. The Democrats didn't reverse them. They added to them. They amended them to make them a little more targeted and then added to them. Yeah. So there is bipartisan support for, you know, because there is just a massive imbalance with China. And the EU is concerned about it as well. Right. Yeah, that's true.

15:51So he has allies. That being said, Donald Trump, as we've learned this week, doesn't seem to care about keeping, you know, his allies aligned with his economic goals. Yeah. You think you're his buddy and then. And so that kind of leads me on to the next thing I was going to ask you, actually. Like, you know, put yourself in the situation where Aiden Reiter has been appointed chief trade negotiator with the EU. Oh, goodness. Most fun job in the world. Sounds fun to me. How does the EU or like the UK or anyone else respond to this when you kind of are not quite sure where you are? It's interesting because we saw both sides of the coin with Mexico and Canada.

16:28Canada was originally trying not to rock the boat. Mexico, Claudia Sheinbaum was much more assertive with Donald Trump. They both got their delay. Yeah. So it's hard to draw lessons there. China doubled down and put 10 % tariffs, but again, not designed to wreck the US economy, although there will be definitely a felt impact. So I don't think there's a clear answer. I think Donald Trump will go after what he wants. The question is, will the market start learning how to respond to this? Well, that's what I was going to ask. What do markets do with this? Because the sort of cliche with Trump is do you take him literally or seriously?

17:00I don't think we're any closer to knowing whether, because I am old enough to remember that if the president or the treasury secretary said something, you could take that statement to the bank and this is what is going to happen. Now we're in a situation where you just kind of don't know. He's imposed these things. Is he going to unravel it later today or is he going to unravel it later tomorrow? I mean, he said a month from now is the delay. It seems that he's willing to negotiate. And I I think if anything we've learned this week is that tariffs, at least in his mind, on everyone but China are not an end in and of itself.

17:31They are a means to an end. They are a means to negotiating, getting concessions, showing strength. So if there's anything we know, it's that EU could theoretically negotiate if they were willing to play ball. The question is, are they in a position to play ball? And also, would they tolerate playing ball after being a U.S. ally for so long that has gone with the U.S. into war and worked together on many things? Trump has already gotten some of what he's asked for from the EU in the last 10 years, right? Defense spending is increasing. There are things they are doing that have appeased him or will appease him.

18:01So it's not clear what else they can give him besides changing some of their fundamental trade balances. So long story short, I think he's willing to negotiate. But it's unclear what the outcome of these negotiations will be. Yeah. The other thing that I think we can really take away from this week is, like we were saying, markets did not completely lose it around this. And that, I think, is like a green light to Trump to say, see, told you markets don't care. I can do I can do this again without it without it hurting the U.S. stock market too much. So I think what he has quite possibly learned this week is that this is fine.

18:35We can do this over and over. We can keep sending out these announcements. We can keep upsetting geopolitical relationships. And there's no blowback to the U.S. Yeah, I mean, we'll see what these negotiations with Canada and Mexico yield, because if they don't fundamentally change the trading relationship, or they fail in increased prices, he'll have consumer backlash. So he is really, to push forward any policy, you're risking somebody getting mad at you. The question is, will it be the market, the consumers, or your allies first? Yeah. Yeah. Someone's going to get cross. I don't know where we're going to end up, but I do know we're not going to go there in a straight line.

19:09In the meantime, we're going to be back in a sec with Longshore.

19:26Alrighty, now it's time for Long Short, that part of the show where we go long, a thing we love, or short, a thing we hate. Aidan, what you got? I'm short British tea culture. Not that I do, controversial, I know. Not that I don't love high tea. I'm a huge tea drinker, love tea. But I really like to find interesting leaves and blends from other countries. No, no, no, that's not how you do it at all. You just drink, like, tea, like just normal builder's tea. Well, not even that, but even when you go to the nice tea stores in the UK, it's not like, oh, what interesting country or style is this? It's like, oh, would you like it with orange blossom or with lavender blossom or with lilac?

20:00And it's like, well, what tea is it? And they're like, what do you mean what tea is it? So I'm short British tea culture. Oh, God. I don't understand anything. Get in the comments. Don't. I am long the penguin. Have you seen it? HBO. Oh, the HBO show. Yeah, yeah, yeah. It's like you're an animal. I do like penguins in general, but the penguin, the HBO show. So like desperate scenes in our household after the traitors ended, didn't know what to watch. It was all very sad. But this thing is really good. Colin Farrell is amazing. The Sophia character is amazing. But Colin Farrell's makeup and like transformation is something else.

20:34Like you wouldn't know it was him. You wouldn't know it's him, but you can still tell there's a gorgeous man under there. You can like see it in his eyes. It's like, oh, that's a good looking man, even though he's wearing these, you know, all these prosthetics. I did not see that, but sure, I'll take another look. Just look at his eyes. It's a big yes from me. Anyway, watch it. Okay, we're going to be back in your ears on Thursday, so listen up then. On Hedge This Week was produced and edited by Jake Hopper. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's Global Head of Audio.

21:09Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.

21:42We'll be right back.