There are two ways Trump’s tariffs could play out. Both are laden with risk
US President Donald Trump seems to have latched on to a new expression: He wants to “reset the table”.
He used the relatively benign-sounding phrase repeatedly in an Oval Office press conference yesterday to describe his hardline tariffs and aggressive posture toward foreign countries —both allies and adversaries.
A series of policies have up-ended the global trade system and wiped trillions of dollars of value from the face of the Earth.
To extend the metaphor, for many, it might feel like he’s attempted to rip the tablecloth from under a fully set meal, leaving a very big mess on the floor.
What jittery investors and world leaders alike are wondering is exactly what this new table setting will look like.
Will Trump want any other countries seated next to him?
Or will America be feasting alone on a more meagre meal?
There are several potential scenarios for how this could play out.
And even though Trump is wielding enormous power right now, he alone won’t decide what happens next.
Scenario 1: Trump backs down after extracting concessions
Trump has long seen himself as the consummate deal maker.
The real estate tycoon’s career has involved a series of high-risk ventures — some of which have paid off and some of which have ended in bankruptcy.
“Sometimes you have to take medicine to fix something,” Donald Trump said about the turmoil on the markets this week. (AP: Mark Schiefelbein)
The early stock market reaction to Trump’s victory in November last year seemed to think his appetite for risk would benefit business.
Investors bet that his planned tax cuts would be good for earnings. And although he’d long railed against international trade, he was unlikely to do anything to badly damage it.
Instead, what he’d do was talk tough, then cut new deals that he could claim were advantageous to the US.
This was, after all, how it played out in his first term.
The North American Free Trade Agreement (NAFTA) renegotiation was perhaps the best example.
NAFTA, a three-country accord negotiated by the governments of Canada, Mexico, and the United States, came into effect in 1994 and fundamentally reshaped their economic relations, with trade increasing markedly.
During his 2016 campaign, Trump railed against NAFTA as “the worst deal in the history of the country”.
He claimed it had moved production to Mexico and Canada at a cost to the US. Many in America’s old industrial heartland — the so-called Rust Belt — would agree with him.
But once elected, instead of ditching NAFTA entirely, Trump negotiated a new deal: the United States–Mexico–Canada Agreement (USMCA), which came into effect in July 2020.
The new agreement did prioritise “US” in its initialism, but like NAFTA before it, it was focused on promoting trade between the three countries — not cutting it off.
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Trump claimed it as a political win, but for many, it was just NAFTA 2.0.
That’s how most investors predicted Trump would behave this time around:
- Publicly decry other nations for treating America badly
- Threaten to destroy their access to the American market if they didn’t change their ways
- Then, once there were some concessions, claim victory but basically leave trade relationships intact
That may still be how this ends up.
Trump is certainly emboldened in his second term. He’s achieved a remarkable political comeback and is now far more experienced with utilising the powers of the presidency.
This helps explain why he’s decided to effectively take on the whole world at once. It’s a massive gamble —but it may pay off.
Donald Trump insists his tariffs plan will reset global order, but many economists remain worried. (Reuters: Carlos Barria)
Usually trade deals take years to negotiate. Trump’s asking other countries to shed barriers in days.
It’s also important to remember that many countries have major barriers to trade in place, which look unfair to many, be they monetary tariffs or currency manipulation. There are legitimate grievances and many will applaud if Trump is able to make international trade fairer.
If other countries offer him a series of concessions, be they meaningful or relatively superficial, Trump may take them and claim a win.
In such a scenario, we may well see global stocks bounce back robustly and the impact on economic growth may be relatively mild.
One analyst on Wall Street, who wasn’t publicly cleared to talk to the media, told me this is how he thought it would play out:
“Let Trump cook,” he said, confident the president could extract a great deal for the US.
How likely is this scenario?
The risk is that Trump may have already overplayed his hand.
When he first began escalating his rhetoric about the US being badly treated, most countries tried to downplay the tension. We saw charm offensives by British Prime Minister Keir Starmer and French President Emmanuel Macron at the White House.
World leaders who initially attempted to woo Donald Trump are now talking tough on his tariffs plan. (Reuters: Brian Snyder )
But with Trump’s words now being backed by actions, an increasing number of countries have hardened their stance — led by Canada.
Trump’s repeated push for America’s northern neighbour to fall in line and his derisive branding of its prime minister as a “governor” appear to have caused a national mood shift.
Many Canadians now believe they’re being unfairly treated.
New Prime Minister Mark Carney is taking a harder line on Trump and has declared the once-close relationship between the two countries “over”.
His position is politically popular, and he looks on track to win the upcoming election.
German Economy Minister Robert Habeck says the European Union can defeat Trump if it sticks together.
And China is threatening to take on the US directly, slapping US imports with a 34 per cent tariff. Trump has since retaliated with an additional 50 per cent tariff on Chinese imports, which are now in effect.
But China doesn’t look to be backing away from this fight.
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“If the US insists on its own way, China will fight to the end,” the country’s Commerce Ministry said.
You can see how quickly this can spiral out of control. Trump doesn’t want to be seen as weak or backing down, but neither do other leaders.
If tariffs start pushing prices up noticeably for Americans and begin hurting businesses, Trump may be forced back to the negotiating table.
Scenario 2: Trump goes all in on his vision to reshape the world
The worry for most investors is that Trump isn’t using the threat of tariffs to extract concessions — but instead genuinely believes in them.
Trump has long trumpeted the value of trade duties. He claims tariffs are one of the “most beautiful words in the English language”.
For decades — long before he entered politics — he praised their value, both as a means of raising tax revenue and as a way to incentivise companies to produce goods in America.
Tariffs push up the price of foreign goods, making it relatively cheaper to produce domestically.
He sees America — the world’s largest economy — as a “piggy bank” that has been raided by other countries.
He has a rather retro view of economics. Instead of seeing the value in allowing American consumers to enjoy cheaper goods produced elsewhere, he sees such purchases as America sending its wealth offshore.
In his first term, most of his key economic team seemed able to curb his enthusiasm for tariffs, usually convincing him not to badly damage international trade by imposing tariffs on friendly nations.
This time it’s different.
One of his key advisers is Peter Navarro, a counsellor to the president and one of the architects of this hardline trade policy.
Donald Trump’s senior trade adviser Peter Navarro is passionately pro-tariffs. (Reuters: Kevin Lamarque)
Navarro has long railed against free trade and he pushed a similar agenda during Trump’s first term.
What’s different now is he seems far more influential.
Instead of being effectively sidelined by former chief economic adviser Gary Cohn and Treasury secretary Steven Mnuchin, Navarro is now front and centre, both determining trade policy and promoting it in near-constant media appearances.
In his first term, Trump also seemed more swayed by investors. Strong stock market performance was his proof of economic success, he’d claim.
“Sometimes you have to take medicine to fix something,” he said this week.
What could happen if he pushes on?
Trump genuinely believes America was better off when it had large tariffs in place to limit trade.
Many economists disagree.
Markets have been in turmoil since Donald Trump announced his tariffs plan. (ABC News: John Gunn)
The last time the US imposed tariffs of the size Trump is proposing was in the 1930s.
President Herbert Hoover signed the Smoot-Hawley Tariff Act into law, imposing taxes on more than 20,000 imported goods in an attempt to protect American jobs.
Other countries responded in kind by imposing or increasing their own tariffs.
The economic situation deteriorated rapidly.
US unemployment soared from 8 per cent in 1930 all the way up to 25 per cent in 1933.
Global trade plummeted by two-thirds between 1929 and 1934.
During the Great Depression, American stocks declined by nearly 90 per cent.
It was a period of awful human suffering.
The lesson for many was clear: There are no winners in a global trade war.
The world hopes Trump’s “Liberation Day” plan doesn’t repeat the mistake of a century ago.
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