Uncertainty Is What Trump Loves About His Tariff Powers
Investors and executives (and Maria Bartiromo) yearn for 'clarity' on tariffs. But withholding that clarity is what gives Trump leverage and attention.
Dear readers,
Business executives and investors don’t know how to respond to President Trump’s ever-changing tariff policies. If they were confident that tariffs would remain fairly modest, they could proceed with their investment plans undisturbed. And if they knew that a particular immodest tariff policy was on its way in, they could at least adjust their plans to account for the coming policy environment. But the current situation — where tariffs are likely to be a lot higher in the future, but nobody knows how much higher or on which products — just leaves them not knowing what to do with their capital.
Fox Business anchor Maria Bartiromo raised this concern in an interview with Trump on Sunday, and he was dismissive:
Bartiromo: After April 2, when those reciprocal tariffs go in, is that it? Are you going to change anything after that? Will we have clarity?
Trump: You will have a lot, but we may go up with some tariffs. It depends. We may go up. I don't think we will go down, but we may go up. And — but you're going to have — they have plenty of clarity. They just use it. That's like almost a sound bite. They always say that: “We want clarity.” Look, our country's been ripped off for many decades, for many, many decades, and we're not going to be ripped off anymore.
Uncertainty is exactly what Trump relishes about his tariff powers. Everyone is at the mercy of his announcements, which can change at any time, so business executives and foreign leaders have to hang on his every word and constantly come to him begging for relief. If he provided “clarity” by committing to a specific and unchanging tariff policy, he’d be giving up both leverage and attention, two of the things he likes most.
The only problem for Trump is that he also likes it when stocks go up, and uncertainty is bad for stock prices because it’s bad for America’s future economic prospects.
Over the first weekend in February, President Trump surprised investors by announcing that he would impose sweeping 25% tariffs on imports from Canada and Mexico that would take effect the following Tuesday. When financial markets opened Monday, the reaction was immediately negative — by 10:15am on February 3, the S&P 500 was down about 2% from its close on Friday, January 31. But the market rebounded sharply that morning when Trump announced that he would “pause” the new tariffs on Mexico for a month, in response to commitments he received from Mexico to assist with US security objectives. An announcement of a pause for Canada followed a few hours later. Stock prices rebounded rapidly, as did the value of the Canadian dollar and the Mexican peso.
On February 3, the collective wisdom of the market held that Trump had, in his idiosyncratic way, provided “clarity” — that when he said the tariffs were coming later, that would really mean “never,” at least for the vast bulk of the threatened tariffs.1
But on March 3, Trump announced the Canada and Mexico tariffs would take effect after all, and stock prices tumbled again. Over the next few days, Trump announced a series of reprieves, seemingly aimed at reversing the market plunge. First, he declared that tariffs on autos would be pushed off by a month. Then he announced pauses on tariffs for USMCA-compliant trade with Mexico, and then finally with Canada. But unlike in early February, the stock market did not credit these moves. Stock prices have continued to trend lower, and as of Wednesday afternoon the S&P 500 was down almost 9% from its peak on February 18.
The difference between early February and early March is that investors are no longer convinced that “later” means “never.” The economic difference between a punitive tariff starting now and a punitive tariff starting in a few weeks is not large. Delays are only reassuring to investors if they provide reassurance about the long-run policy environment — if they offer clarity — and they no longer do that. Investors also know now that Trump is motivated to actually impose tariffs and bluff about them for attention and leverage. While he talked a big game about tariffs during his first administration, the tariffs he ended up imposing were not that large compared to the size of the US economy, unlike the ones he has threatened and imposed in recent weeks.
The president’s tariff policies are so stupid that I’m a little at a loss about how to discuss them. The weak defenses coming from the president’s acolytes are instructive about how indefensible the policy is. Months ago, we heard that the markets love Trump because they know he’s good for business and for growth. Now, what we hear is that we are in for a period of short-term “disruption” or “adjustment,” and that’s why stocks are down, but in the long run his policies will make the US richer and stronger. But financial markets are forward-looking — a stock price today is a reflection of expectations of future profits. If Trump’s policies are really going to favorably trade off short-term pain against long-term pain, they might have negative effects on indicators like inflation and employment, but they should still cause stocks to go up. That they instead cause stocks to go down is a clear signal: these policies are likely to make the US economy smaller in the long run.
The tariffs on Canada are particularly exasperating because of their transparent pointlessness. Tariffs on goods from China serve a national security purpose: helping to decouple our economy from that of a hostile communist power. The US has significant policy disputes with Mexico, in which tariffs could be used as a penalty or a point of leverage. And while I largely disagree with it, a popular critique of US trade with middle-income countries like Mexico and China is that it depresses wages by forcing US workers to compete with lower-paid workers elsewhere. But Canada is a friendly, cooperative, and high-income country. Indeed, Trump’s preposterous threats to turn Canada into the “51st state” reflect a recognition that Canada’s economy is fundamentally similar to and compatible with America’s, and that requiring workers in Ohio to compete with workers in Ontario is not that different from requiring them to compete with workers in Indiana.
So why are we having a trade war with Canada? Why does Rich Lowry need to patiently explain to Republicans that “Canada is not the enemy”? As far as I can tell, it’s because Trump sincerely believes his rhetoric about tariffs making America rich and strong and free. He actually thinks we’re better off if we don’t trade with foreign countries, he’s no longer encumbered by the caution and (relative) intellectual humility that drove his first-term economic policymaking, and he finds it fun. The only thing that might limit the trade war is that Trump might care about how its negative economic effects impact him.2 If falling stock prices and rising goods prices dent his political popularity, will he care, as a lame duck? If he doesn’t care, he can just keep us on this stupid ride indefinitely.
And I hate it.
Very seriously,
Josh
We heard a lot about the economic risks of uncertainty during Trump’s first term, but as my friends and I discussed on a podcast back in early January, it did not appear that Trump’s mercurial public statements actually did much to diminish investment returns or economic growth back then. The difference between then and now was that the policy environment was not actually that uncertain in his first term. Trump talked a lot, but the policy agenda was in the steady hands of people like Steve Mnuchin and Gary Cohn. Trump’s threats to exit NAFTA turned into a relatively modest reform of the agreement into the USMCA, and on a global scale the tariffs he imposed were just not that big, so executives and investors were able to look through Trump’s statements and sometimes-grandiose commentary and proceed with business as usual. Plus, Trump enacted other policies that gave them positive clarity — most notably, a corporate income tax cut that both goosed stock prices and increased the returns to business investment.
Even though the Constitution gives Congress the power to set tariff policy, Congress will not be the limiting factor here — indeed, Republicans just strengthened Trump’s tariff-setting powers by including a provision, within the rule the House used to pass the continuing resolution to fund the government, that prevents members from forcing votes on rescinding his tariffs.
I would like to know when and how we will have hit rock bottom hard enough to get congressional Republicans to check Trump’s stupid and damaging actions, including these tariffs. It seems obvious that relatively small scale policy changes during Trump I were muted by relatively competent Cabinet level officials, whom Donald Trump hated. He spent the intervening years calling these people “the deep state” and now has his preferred team of ignorant conspiracy theorists and sycophants. We can therefore expect everything to get worse. (Who wants to predict how many Americans will die of measles over the next four years?)
At the same time, we can’t count on people like Rich Lowry to assert that Canada isn’t our enemy for longer than a couple weeks before he feels compelled to construct a pseudo-intellectual justification for whatever Trump imagines as policy. I remember Lowry going from “obstructing aid to Ukraine would be very bad” to “obstructing the provision of aid to Ukraine is only a problem if it was congressionally authorized aid” to “okay, it was, but it’s fine because Trump didn’t SUCCEED in obstructing its delivery!” I haven’t checked back - I assume Lowry now says Ukraine has been unacceptably mean to Vladimir Putin.
So, what’s rock bottom for these people? Asking for a country (and maybe the free world).
Spot on. But I also wonder who in the inner circle might be profiting from some of these market movements and whether it's partially about that