TARIFF MAN

Trump thoughts, protection rackets, coercion and tomatoes

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We go again.

Many people, including me, have written lots already about what a second Trump Presidency means for global trade. Annnnnnnd, there’s lots to write about so here are some more thoughts:

• A universal US tariff, i.e. lifting the tariff floor on all imports to 10 or 20% would probably be less damaging than a scenario in which different elevated tariffs levels apply to imports from different companies or countries. By this I mean that if you are a, say, Japanese exporter to the US and Trump applies a blanket 10% tariff on all of your exports **and** all of the exports of your international competitors then while your products loses competitiveness vis-a-vis US-made products, your products don’t lose any comeptitiveness vis-a-vis non-US-made products. However, if, say, a South Korean exporter manages to get themselves exempted from tariffs, it means your Japanese export becomes relatively less competitive on the US market than both US and South Korean alternatives. FWIW, my money is on there being loads of country- and company-specific exemptions. [More on the exemption “process” below.]

• The Elon factor. We do not know exactly what Musk’s influence will be on Trump’s policies and we do not know exactly how long it will last. But we do know that Musk’s interests, say, in respect of China are not entirely aligned with those that want to decouple the US’s economic relationship. Whether this materialises in blanket policy shifts that impact entire sectors, for example a reversal of EV tariffs [I think unlikely], or specific derrogations for inputs relevant to his companies [more likely], we need to wait and see.

• Chinese investment? On a similar note, while Trump has been consistent in his desire to throw tariffs around and force companies to move production out of China and into the US, he has also show less concern than the Biden administration about Chinese investment into the US. This has some potentially interesting implications for rules such as the proposed prohibition on the sale or import of connected vehicles integrating specific pieces of hardware and software, or those components sold separately, with a sufficient nexus to the People’s Republic of China (PRC) or Russia. The most interesting thing about this rule is that, if implemented as written, it would prevent cars with the prohibited hardware being placed on the US market even if the Chinese firm made that hardware at a factory in the US. Now, I’m not so sure Trump is really so bothered about the security threat (although others in his administration may be) and probably cares more about the investment in the US. So my guess would be that even if the rule itself doesn’t change, we may see lots of … yes, you guessed it, derrogations.

• USMCA, Trump’s NAFTA replacement, is going to get completey borked. Not really much more to say about that.

• Countries and companies are going to be forced to choose between US tariffs or China tariffs. As I’ve written elsewhere, my basecase is that Trump is going to use the universal tariff threat to force other countries to buy more stuff from the US (e.g. defence equipment) and be TeamTrump when it comes to his other endevours, e.g. China tariffs. This means that, say, the UK will probably need to decide whether US tariffs are preferable to the Chinese tariffs that would probably be imposed in retaliation for the UK copying the US tariffs. My prediction is that countries will attempt to find a goldilocks zone in which they impose some additional tariffs on China (possibly ones they were considering anyway) in the hope it doesn’t prod the bear too much and placates Trump, at least to a point. In the EU this could mean EV battery tariffs, steel tariffs, and tariffs on other green products (solar, wind) and in the UK … EV tariffs? Will it work? Who knows. Once you start throwing tariffs about the risk of unintended consequences is pretty high.

That will do for now. I imagine I’m going to be writing about this topic for a while.

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Never forgive, never forget

On the subject of tariff derogations, who do you think is more likely to get one?

1. The company, or country, that publicly supported Trump during the election campagin and even, possibly, gave him lots of money to ensure his victory.

2. The company, or country, that said nothing .

3. The company, or country, that publicly supported Harris during the election campaign and even, possibly, gave her lots of money to ensure her victory.

The answer is obviously 1., but this isn’t just me being facetious. I have highlighted the study before, but there is a fairly rigorous academic evidence base demonstrating that during the first Trump Presidency firms that had supported Trump were more likely to get derrogations from his China tariffs than those who didn’t and, more interestingly, that firms that hadn’t supported Trump were actively punished [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.

So, I guess the lesson here is … not neccesarily a good one? And it definitely applies to countries too.

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Definitely not coercion

The EU’s anti-coercion regulation says “‘economic coercion' refers to a situation whereby a third country seeks to pressure the European Union or an EU Member State into making a particular choice by applying, or threatening to apply, measures affecting trade or investment.”

Which brings me to this Reuters news report about the Chinese response to EU EV anti-subsidy tariffs: