According to the ubiquitous people familiar with the matter, a comprehensive US-Europe trade accord won’t likely be finalized by the deadline implicit in Donald Trump’s 90-day tariff “pause,” which expires early next month.
The urgency of the Israel-Iran war crowded out tariff news last week, but lest we should forget: July 9’s “D-Day.” Or at least it’s supposed to be. That’s the drop-dead date for countries other than China to cut a trade deal with Trump or risk the imposition of punishing tariffs.
You’ll be forgiven for rolling your eyes. Trump’s deadlines aren’t deadlines. And even if he means for them to be, all it takes is a stock selloff to dissuade him. Or a charm offensive on behalf of a foreign government.
Setting aside the “TACO”s, trade tensions are likely to flare up again in the weeks ahead given the impossibility of the time line. Apropos, Bloomberg said Saturday the EU’s grown frustrated with Trump’s demands. Unnamed officials in Brussels are complaining The White House wants “unbalanced, unilateral concessions,” and that it may not be possible for Europe to placate Trump without unduly compromising its own interests.
The linked article said the “best-case scenario” is a framework — an “agreement on principles that would allow the negotiations to continue.” In other words: An agreement to keep talking, not a deal, let alone the sort of grandiose arrangement Trump promised to deliver.
This seems like ancient history now, but it was just a few weeks ago when Trump threatened to immediately slap a 50% tariff on all trade with the EU. He quickly walked that back, but ostensibly anyway, that’s the rate at which goods from the EU would be taxed if an agreement doesn’t materialize by July 9.
That’s a ridiculous proposition and it wouldn’t be sustainable, but it’d be consistent with Trump’s inclinations to decouple from Europe and otherwise treat France, Germany, Italy and so on as second-class states in a world where the US, China and Russia are the only actors with agency. That inclination was on display this week when Trump said, “Europe is not going to be able to help” when it comes to a mediated resolution to the Israel-Iran war.
I say all of that because it feels like market participants are back to underestimating the potential for ongoing trade frictions to undercut consumer and corporate sentiment, as well as global growth.
The figure above, from BofA’s June Global Fund Manager poll, suggests eight in 10 professional money managers expect the average US tariff rate to be 15% or below.
Note that nearly half anticipate Trump will be satisfied with an average rate of 10% or less, which is (basically) to say he’d be willing to remove all tariffs other than an across-the-board 10% levy. That seems like wishful thinking to me, “TACO” or not.
Remember: Trump’s tariff regime includes a hodgepodge of sector- and product-specific levies, including 25% duties on cars, planned taxes on computer chips and metals tariffs that’ll ultimately be applied at 50%. I’m not sure it’s realistic to suggest the average US tariff rate, which was between 2.5% and 3% before Trump’s second term began, will somehow settle at 10% or less.
I suppose the thinking is that because an average US tariff rate of 15% or more would ultimately backfire by undercutting US growth and corporate bottom lines, Trump won’t ultimately be able to sustain it.
That’s fair, but it may take a while for someone who calls himself “Tariff Man” to come around to the inescapable reality of this situation, which is simply that if you quintuple the rate at which you tax trade flows, you’re going to irritate a lot of people and cause a lot of problems for US corporates who have globalization to thank for two decades of falling COGS as a share of sales.
For now, US profit margins are robust near record highs, debt servicing costs are near record lows and corporates are free to return money to shareholders, bolstering stock prices. One way to upset the apple cart is to force investors into rethinking their margin assumptions for corporate America.
Expect markets to start fretting about all of this again as July 9 comes into view.
I doubt he still remembers that he threatened the EU with a 50% tariff rate, partly because it feels like so much has happened in the short time between then and now. With Trump 2.0, a month = a year’s worth of action.
You can’t control the real world of facts with lying, bullying, name calling and an infallibility cloak gifted by SCOTUS. Unfortunately, the first three are all Trump has ever known and he has never learned new tricks. How soon do we get to the ‘shootout at the OK coral’ with nukes instead of 6 shooters.
“. . . an infallibility cloak gifted by SCOTUS. . . .”
That’s certainly what it seems like.
He also runs into some math problems if the tariffs are too low, as he’s promised fiscal conservatives that the budget deficits they’re concerned with will be immaterial with all of the tariff money that the country will be taking in.
I think they’ll pass the bill using higher projected tariffs, and then just grouse about the much larger deficits that are realized as time goes by.
We’re standing between two poles with rock steady profit margins on one end and recently variable prices and inflation on the other, set against a backdrop of large caps mostly insulated from near-term rate increases, should either inflation or the term premium decide to get unruly.
As a consumer and employee, that would appear to be an unfavorable set up for me. But as an investor, not the worst scenario. Unfortunately, if profit margins and equities remain buoyant, there may be little to restrain the worst of our vengeful dealmaker’s hellscaping, whether domestic, next door, or abroad.