Dem
47
GOP
53
Yesterday, Donald Trump nominated Stephen Miran to the seat on the Federal Reserve that was vacated by Joe Biden appointee Adriana Kugler. Miran is currently Chair of the Council of Economic Advisers, having been confirmed to that post in March of this year. Assuming he is confirmed (likely), he will serve as a governor until (at least) January 31.
The basic goal here—to have a Trump administration insider on the Fed Board of Governors, advocating for Trumponomics—is clear. Beyond that, there are some big questions with no answers. Obviously, someone cannot be on the Federal Reserve AND be a member of the administration at the same time, but will that actually be honored here? Even if Miran formally resigns his current post, he could still visit the White House on a regular basis to share "advice." Beyond that, what's the plan in January? It seems improbable that Trump would want to lose an economist who: (1) has a Ph.D. from Harvard and (2) always tells the President what he wants to hear. We would guess that the plan is to re-nominate Miran to the seat once the balance of the Kugler term is complete in January. Alternatively, Miran could return to his current job. If the latter proves to be the case, then it REALLY raises questions about how much of a resignation this actually is.
All of this said, the primary reason we lead with Miran is that most of the pieces written about the appointment described him as the "architect" of Donald Trump's tariff plans. When we first saw that characterization, we were a bit taken aback. It is true, Miran is a key economic adviser in this White House. It is also true that he is a highly educated economist who wrote a paper entitled "A User's Guide to Restructuring the Global Trading System."
However, Miran's paper was not peer-reviewed, and did not appear in any sort of scholarly publication. It was, instead, posted to the website of Hudson Bay Capital Management, which is involved in a bunch of different parts of the financial services sector, including hedge funds and private equity. That means that Miran was free to engage in a bunch of off-topic political grandstanding; Trump himself is mentioned no fewer than 56 times in the body of the document. It also means that Miran could unfurl his statistics and his "analysis" without any sort of pushback from the people most likely to see the holes in his arguments (and trust us, there are many times, on reading over the paper, that we were reminded of the old line about "lies, damned lies, and statistics.")
But beyond the fact that Miran's "architectural rendering," if we may call it that, is dubious at best, is there really any reason to believe that the Trump administration has followed ANY coherent plan on tariff policy—Miran's or otherwise? The first major wave of tariffs, as everyone knows at this point, were slapped on anyone and everyone, including, in one case, an island full of Australian penguins. Those tariffs were, by all indications, the product of nonsensical math, and math that was probably provided by AI. Since then, they've been on again, off again. They have also been revised up, or down, based primarily on Trump's personal feelings. Slate's Fred Kaplan also has a Ph.D. (albeit in political science). He wrote a piece this week headlined "Trump's Official Trade Policy Is to Be As Incoherent As Possible," with the subhead, "Tax rates are being set by a mix of the president's confusion, avarice, and personal grievance." We recognize, of course, that Slate and Kaplan are both left-leaning. But that outlet's characterization gets much closer to the truth of things, in our view, than the notion that there is someone in the White House who served as "architect" of a coherent policy, with a clear set of goals. The notion that the trade war is a haphazard mess, with no clear underlying logic, is going to inform our conclusions from here out, so keep that in mind.
In any event, the trade war has now arrived... kinda. The deadline that Trump announced, 12:01 a.m. ET on Thursday arrived, and no further trade deals/frameworks were announced, so the harsh duties promised by the White House have (theoretically) been imposed. Now, every nation's imports to the United States will face levies of at least 10%. There are 67 nations where the rate will be at least 15%, and for 21 of those 67, the rate will be greater than 15%. The nations whose goods will be hit the very hardest are Brazil (50%), Laos (40%), Myanmar (40%), Switzerland (39%), Iraq (35%) and Serbia (35%). Keep in mind that Trump regularly changes his mind on a whim, such that any or all of these figures could become out of date at any time. For example, he's warned that India is about to be hit with a steep increase, because it continues to trade with Russia. If the President follows through on that, then that nation would join Brazil in the 50% club. He's also threatened a 100% tariff on semiconductors, a 250% tariff on pharmaceuticals, and a bunch of other targeted rates like that.
The reason that we write that the trade war has "kinda" arrived is not the extremely fungible nature of the rates, however. It's that collection of most of the duties will not start immediately. As we have noted a couple of times, Trump gave an "out" for goods already in transit, such that the tariffs will not be fully imposed until early October. And Secretary of the Treasury Scott Bessent spoke to many media outlets this week, some of them legit, some of them Fox, to make clear that the Thursday deadline is not a big deal, and that those nations are free to keep negotiating. This all sure seems like a strategy to largely postpone the latest deadline, but without a bunch more "Trump always chickens out" (TACO) stories and memes.
That said, thus far, TACO has been on the mark. And the thing that invariably spooks Trump is the response of the markets. Yesterday, the Dow Jones was down 0.5% and the S&P 500 fell 0.1%, while the Nasdaq Composite was up 0.4%. Meanwhile, 10-year Treasury yields were up in yesterday's auctions. That means that buyers (aka the people lending money to the government) demanded higher interest rates for their investments. That, in turn, means that the market is more leery about U.S. government debt, and that the government thus has to pay more to borrow money. If that were to continue, it would be a real problem for the federal balance sheet, especially given that the BBB was based substantially on magic accounting and wishful thinking.
The point is that the trade war isn't quite here yet—at least, not the full-blown version of the trade war. Maybe it will slowly arrive over the next couple of months. Or maybe, next week, there will be another TACO Tuesday. Or maybe most/all of the nations targeted for high rates will work out a trade deal/framework/firm promise written in lipstick on toilet paper. If we said we knew what is going to happen, we would be lying.
What we do know, however, is that—largely due to the fact that Trump's trade policy is haphazard, and being driven by a man who is mercurial at best, and losing his cognitive abilities at worst—the administration has painted itself into several corners that it will not be easy to get out of.
First up, the White House continues to brag about how much money its tariffs are bringing into the United States. Indeed, just moments before the Thursday deadline hit, Trump posted this to his not-subject-to-tariffs-so-what-do-I-care? social media platform:
IT'S MIDNIGHT!!! BILLIONS OF DOLLARS IN TARIFFS ARE NOW FLOWING INTO THE UNITED STATES OF AMERICA!
We would really like to know: Was Trump, who is generally known as an early-to-bed, early-to-rise type, sitting there at 11:58 p.m. ET, finger hovering over the "post" button, just waiting to send that message? Or, does he actually know how to schedule a message in advance? Was there a staffer whose job it was to make the posting at the appointed time? However it happened, other members of the administration made sure to reiterate the talking point. For example, Secretary of Commerce Howard Lutnick appeared on Fox Business Channel to predict that the tariffs would produce revenues of $50 billion a month or more.
There are, in our view, two problems with this braggadocio. The first is that it makes it much harder for Trump to back down, since he and his underlings have framed this as such an important benefit and achievement. The second, and much more serious, is something we have already pointed out several times. Trump and his administration can certainly make the claim that the tariffs are being paid by foreign countries and producers, and that the billions of dollars raised are coming out of the hides of Brazil, India, China, Japan, the E.U., etc. Indeed, he makes that claim in his midnight message, that the money is "flowing into" the United States. But claiming that does not make it so.
It's Economics 101 that the costs of tariffs are borne mostly by consumers, not by producers. Anybody who has taken an econ class surely knows this. Heck, anyone who's taken a U.S. history class probably knows this. Remember that the kerfuffle about tariffs in the late 1820s and 1830s was because Southern states did not want to receive less money for their exported cotton, and did not want to pay more for manufactured goods, due to higher tariffs. Never once did John C. Calhoun or any of the other Southern fire-eaters say: "We oppose these tariffs because we just don't think it's fair that France and the U.K. should be forced to contribute to the national treasury. Now, get me another mint julep."
Democrats running for office this year, next year, and very likely in 2028, will do everything they can to make clear that tariffs are a sales tax on American consumers, taking money out of the pockets of American families (and, on the whole, in a very regressive fashion). Undoubtedly, most Democratic voters already believe this, some because they understand how tariffs work, others because they reflexively hate anything Trump does. We imagine that many independents will be won over to this point of view (if they are not there already), and that some Republicans will be, too (again, if they are not there already). The blue team's Trump card, as it were, is results. There is no doubt that, if Trump does not back down, things are going to get noticeably more expensive for the average family. The best estimates are around $2,400 less purchasing power per household, though it could get worse if the double whammy of paying tariffs AND inflation kicks in. It's not too hard to say: "Voters, the tariffs are coming from YOUR pockets! Look how much more expensive that TV/iPhone/car was, as compared to this point a year ago!"
Now, let's shift gears, and talk about a second messy problem. Readers will recall that, at the outset, we gave credit to Trump for "winning" in his negotiations with the E.U. Then we took a second look, with the benefit of a bit more information, and bit more time to reflect, and were less impressed. And then we took a third look, and decided that these trade deals look an awful lot like an "emperor's new clothes" situation, where there is actually no "there" there.
This is now something of a consensus view, it appears, as the trade frameworks (which are informal, and unsigned) are getting shakier by the day. It is true that the E.U. and Japan, among others, are now subject to 15% tariffs (or will be, once October arrives). However, by making a "deal" with Trump, they kept their rates from being higher, while giving themselves time to maneuver, often by bickering about what exactly was agreed to in these informal, unsigned agreements. For example, just yesterday, and for the third time, Japanese officials launched a round of "I know you think you understand what you thought I said but I'm not sure you realize that what you heard is not what I meant." Obviously, if these nations decide that playing nice is no longer useful, they could, at any time, impose retaliatory tariffs. The E.U. deal is especially fragile, since those nations will only sublimate their sovereignty so much before acting in their own best interests. Indeed, Germany has already begun maneuvering that might cause it to have a different trade deal from the E.U. one.
Even more vapory than the tariff rates are the hundreds of billions of dollars in investments that these entities promised to Trump, as part of their trade frameworks. As we have already noted, none of these promises involved money from the respective governments involved. It was all promises of private investment, which the national governments cannot compel. To put it another way, the various European and Asian negotiators were expressing something aspirational, and something that, if it does happen, would happen with or without the trade framework. After all, multinational businesses are quite literally in the business of seizing profit opportunities in any nations where they can find them.
A new blog posting from economics Nobel Laureate Paul Krugman, late of The New York Times, makes clear that Trump's understanding of the investment promises is radically different (and thanks to reader S.C.-M. in Scottsdale, AZ, for bringing the blog post to our attention). Krugman watched Trump's much-hyped appearance on CNBC on Tuesday, and noted that the President described the $600 billion commitment from the E.U. as a "gift" and claimed it is: "$600 billion to invest in anything I want. Anything. I can do anything I want with it."
Obviously, and as Krugman points out, there is no way that a foreign government is going to create a de facto slush fund for Trump, particularly at that level. Giving him a free airplane? Maybe. Picking up part of the tab for a space for Trump to hold his balls? Maybe. But no nation (or confederation) is in a position to, or would be willing to pay, in effect, a bribe that is north of half a trillion dollars. So, it only requires common sense to know that Trump is either lying, or that he misunderstood, when it comes to this claim (and he's made the exact same claim about the money promised by South Korea). And beyond common sense, these nations have already come out and said that the money is not what Trump thinks it is.
So, what will happen when one of the "trade framework" nations decides to adopt reciprocal tariffs? Or when it becomes clear that Trump is NOT getting a slush fund (and, in fact, that much of the "promised" money is not forthcoming)? He could back down, but that would be embarrassing and un-macho, and is not his style. What is vastly more likely is that, instead of backing down, he will double down, and will impose even stiffer tariff rates on Japan, or the E.U., or some other nation.
The problem here, as the Krugman piece points out, is that Trump has already used up most of his trade gunpowder. The various nations affected by tariffs are already working to do the rational thing, and to redirect as much of their trade as possible away from the United States. Krugman estimates that the 15% tariffs, in the case of the E.U., will result in a drop in trade equivalent to 2% of the GDP of those nations. That's not nothing, but it's not fatal. If the tariffs were to jump to 35%, he estimates the additional drop in trade would be just 0.7% of GDP. What that means is that the 15% tariffs were and are a meaningful threat, because that's where the pain is. Anything above that, however, isn't all that different. So, if Trump can't get what he wants out of the 15% threat, he's not likely to get what he wants out of a 35% threat. And the administration's position gets weaker, day by day, and month by month, as nations permanently re-orient their supply chains, and so become permanently less reliant on trade with the U.S.
There is also a related problem. If any (or most, or all) of Trump's trade frameworks fall apart, for whatever reason, and result in him throwing a temper tantrum and reneging, then nobody is going to be willing to do deals with him or his administration anymore.
Messy problem #1, then, is the trade war itself, where the administration cannot move forward, and cannot move backward, without taking some serious damage. Messy problem #2 is the trade frameworks, which look more and more like houses of cards. We'll finish, briefly, with messy problem #3, which is the pending litigation against the administration, which is premised on the argument that the tariffs are illegal. There are actually two separate arguments (and there are several different lawsuits). The first argument is that there is no "national emergency" that justifies Trump's tariffs. The second is that even if there was a national emergency, Congress was not entitled to delegate tariff-setting power to the executive branch.
Truth be told, losing in court is probably the best outcome for Trump, even if he doesn't think so. That would allow him to end the trade wars, and to point the finger at someone besides himself. Even so, this outcome would entail at least three downsides. The first would be the embarrassment of being rebuked by the courts, especially since Trump presents himself as so strong and manly that no damn judge or judges get to tell him what to do. The second is that there would still be some economic fallout, as markets have already been disrupted, supply chains have already been reworked, and trade relationships have been damaged. The third is that if the "emergency" tariffs are illegal, then they are all illegal, including the ones that have already been paid. So, the administration could find itself in the position of being ordered to refund the billions it's already collected. That is a process that would be messy, to say the least.
We did not quite expect to write 4,000 words on this subject, but that's how it goes, sometimes. The executive summary is this: One way or another, one of the key elements of Trump's political program, and one of the areas where he's done the most bragging about his "accomplishments," is likely to go belly up eventually, either at the wrong end of a judge's gavel, or at the wrong end of an economic/foreign backlash. And the cost will be some amount of losing face, and some amount of economic turmoil. And basically, those two things exist on a spectrum, such that the less there is of one, the more there is of the other.
Even if Trump were to decide today that he wanted to end the trade wars completely, he and the country would both take damage. There's no penalty-free "Eject" button available, not anymore. At this point, the only question is how much damage will be done to Trump (and his political party), how much will be done to the country, and on what kind of timeline. (Z)