Taxes, lies and ideals
Despite the storm on equity markets that followed the announcement of new trade tariffs on 2 April, from the plane taking him to one of his golf courses, the US President beamed, “it’s going very well”.
Indeed, the S&P lost close to 5% on 3 April, driven by falls of a magnitude rarely seen, with Meta, Apple and Amazon all dropping 9%, and close to USD 2,000 billion wiped off the stock market capitalisation in a single day. But at least, Trump assured us, justice would be done: America would no longer let itself be abused by countries taking unfair advantage of its excessive generosity. The trade balance should soon level out as products imported from Lesotho will now be subject to 50% tariffs, as will those from Saint Pierre and Miquelon, and Laos. Indeed, the list of tariffs are differentiated down to this level of detail by country, with even a mention for the Falklands, with its 3,500 inhabitants – but a lot more penguins!
This is all rather unnerving, but there is one lesson to be drawn, however surrealist it may seem – what counts for Trump is the posture, not the reality. The posture is clear: a President saves the United States from submission to evil foreign powers. The reality is that he is inflicting an immediate and massive price rise on imported goods for US consumers, with the knock-on effect of a likely fall in consumption, which could result in recession. This is all the more likely as there will probably be reprisals, which will directly impact US exports. The brake will therefore be twofold – on consumption and on production.
The economic reality is so far from the President’s preoccupations that the very basis of the reasoning behind the tariffs has no value. The calculation of trade tariffs that he calls “reciprocal” is actually based on a formula that no reputable economist considers appropriate. It simply reflects the US trade deficit with a country as a proportion of the total trade balance with that country and has nothing to do with tariffs. Implicitly, it considers any trade deficit as a symptom of insufficient tariffs, whereas there may be multiple causes, which are not necessarily problematic – for example, when a product can only be imported from a specific country due to its expertise or its position in the value chain. A Burgundy wine can only be produced in Burgundy. A deficit in this type of trade does not necessarily arise due to insufficient tariffs.
Not only does the formula used by Washington have no economic value, it also ignores almost half of the trade economy. It only considers trade in goods, but not in services, an area where the US generally runs a surplus. If the Europeans – who run a services deficit – were to apply the Trump formula to trade in services, they would have to impose heavy taxes on the income generated by the likes of Google, Visa and Disney. Indirectly inspired by Trump, this idea is gaining traction in Brussels.
Lastly, Trump has not properly assessed the reality of trade wars in the past. If we look at examples of trade wars conducted by the US and other countries – and everyone has tried this at some time in their history, including the Europeans – we can see that such trade wars have such a cost in terms of reprisals on trade that they generally end up being abandoned. This was the case with the trade war prosecuted by President McKinley, one of Trump’s favourite references. McKinley was a protectionist president from 1897 to 1901, but nonetheless stated in his last speech prior to his assassination, “Commercial wars are unprofitable. A policy of good will and friendly trade relations will prevent reprisals.”[1] Let’s hope that we don’t have to wait for Trump’s last day for him to arrive at the same conclusion as his idol.
Final version of 4 April 2025 │ Alexis Bienvenu, Fund Manager, La Financière de l’Échiquier
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[1] https://millercenter.org/the-presidency/presidential-speeches/september-5-1901-speech-buffalo-new-york