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Also, beware ... guitar tariffs
Liberation Day 2.0 approaches. And there’s going to be lots of talk about deals. How many more deals will there be? Are the deals good or bad? What even constitutes a deal?
For now, the conversation has focused on deals between the US and countries (or, in the case of the EU, a collection of countries). However, other than the occasional murmuring, we haven’t yet begun discussing negotiations between the US and individual companies.
But I think this will change.
I’ve mentioned this before, but during the first Trump administration, quite a few companies were granted tariff exemptions seemingly based on their proximity to Trump and his buddies.
One much-referenced academic paper found that [emphasis added] …
Our evidence on campaign contributions strongly suggests that politicians are effectively using exemptions to reward supporters and withholding exemptions to punish supporters of their opposition. This points to a perverse incentive—an administration controlling the executive branch of the US government can create roadblocks to firms, generally in the form of tariff exemptions, and then create benefits by strategically removing such roadblocks for their donors, while preventing exemptions from being granted to supporters of the opposition. The evidence we offer of such retaliatory behavior is novel in the literature linking political connections to corporate finance.
In event-study analyses, we quantify the value of an exemption for the median firm in our sample at approximately USD 51 million. We also find that markets react more forcefully (larger positive abnormal returns) to the acceptance of exemption applications from firms that are less likely to obtain approval. The implications are meaningful: the dispensing of “favors” to connected firms and the “punishment” of firms connected to the opposition is not hidden—the quid pro quo is out in the open, for market participants to observe and price into firm valuations. This can also create incentives for firms not supporting the current administration to reconsider how they make political contributions in the future.
Currently, no equivalent process has been established for the Trump 2.0 tariffs. But I suspect it is coming.
This is because, I also suspect, not all of the negotiations with countries are going particularly well.
And while negotiating with individual countries is preferable for the purpose of meeting three of the four Trump tariff-related objectives (1/Make more stuff in the US 2/Buy more American stuff, 3/ Regulate American companies more nicely and 4/ Raise tariff revenue) negotiating directly with companies can still achieve at least one of these, and arguably the most important one at that (1/Make more stuff in the US).
For example, I think it is quite possible we see deals that look something like this (note: some of the details may not end up being public/explicit):
Company A commits to invest $XX billion and to move production of Product y to the US over a three-year period. As a result, they can claim a tariff refund for 90% of related duties paid in year 1, 50% in year 2, and 25% in year 3.
Company B already produces the vast majority of product x in the US and has made commitments to invest further. So long as over 85% of product x sold in the US every year is produced in the US, they can claim a tariff refund for the remaining 15%.
Company C donates lots of money to Trump’s re-election campaign and gets tariff relief as a result.
Etc.
This approach has the dual benefit [for Trump] of cutting out difficult negotiating partners *and* really annoying them.
For example, could the EU fail to negotiate an across-the-board US tariff reduction for its car exports? I think that’s quite possible. Could individual EU-headquartered car brands negotiate their own exemptions linked to their US manufacturing footprints? Also possible.
Usually, when I write things like this, the type of question that comes back is whether it would be legal for the US to discriminate against individual companies like this, whether it is technically possible, and whether I recognise how dodgy it all sounds.
So, to get ahead of that, my answers in the same order: From a US domestic law perspective, I have no idea, but from an international law perspective, the US clearly doesn’t care about that, so we should proceed on the assumption that it will do what it likes; yes, it’s technically possible although it would probably create a relatively significant adminsitrative burden for the companies involved; and yeah, it’s not ideal.
Trade diversion update
The European Commission has published the June edition of its Trade Diversion Watch List.
It’s worth keeping an eye of this to get a sense of which products the EU might tariff as a result of Trump-related trade diversion.
(Reminder: lots of people are worried about this dynamic.)
Anyway, these are the most amusing products on the list:
Water-skis and surfboards. 42% YoY change in quantity/-15% YoY change in price
Line fishing tackle. 53% YoY change in quantity/-14% YoY change in price
Parts of nuclear reactors. >1000% YoY change in quantity/-74% YoY change in price
Fresh or chilled truffles. 107% YoY change in quantity/-28% YoY change in priace
Fountain pens. 221% YoY change in quantity/-58% YoY change in price
Electric guitars. 487% YoY change in quantity/-78% YoY change in price
Best,
Sam
What a mess.