May29

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Trump Appears to Have Lost His Trade Wars Even Before They Started

Yesterday, we were going to run an item headlined "Trump's Tariffs Hit a Few Snags." We are fortunate we ran out of time while writing that post, because after we went live, there was yet another snag, probably the biggest of them all. Sometimes, the early bird does NOT get the worm.

Before we get into specifics, let's talk a little bit about tariffs in general. And to start that part of the discussion, let's start with... a sports analogy. There is an old saying in football, which we have mentioned before, that a team that has two quarterbacks doesn't have any quarterbacks. That is to say, if a team does not have a clear-cut best option for that position, the most important on the field, team management has not done its job. If you would like to observe a real-life example in action, the Pittsburgh Steelers' 2025 schedule is right here. We thought about giving you the Cleveland Browns schedule, but they actually have FIVE quarterbacks (with all that implies).

What does this have to do with tariffs? Well, tariffs can broadly be used to pursue two basic sets of goals. The first set of goals involves tariffs that the government actually intends to collect. Such tariffs can be used to raise revenues, and to gain leverage in trade-deal negotiations, and potentially to correct certain kinds of trade imbalances. The second set of goals involves tariffs the government does NOT intend to collect. In general, the purpose here is to either punish some foreign nation for its misdeeds (environmental abuses, use of sweatshop labor, manufacture of exported goods that are designed to spy on the end consumer, etc.) or to provide protection, or near-total protection, for some domestic industry (i.e., production of computer chips).

A football team can't start two quarterbacks at the same time. And a nation cannot go all-in on both types of tariff policy at the same time, as they are in conflict. Either you want to regulate trade, or you want to shut it down. To the extent that Donald Trump has explained his trade wars, he has promised all the benefits of the first category of tariffs AND all the benefits of the second category of tariffs. He can't have both. Or, to put it another way, a president who has two different tariff policies has no tariff policy.

Regardless of what Trump's goals are—and it's entirely possible even he doesn't really know, or that he doesn't really understand that he's pulling in two opposite directions—his plans are in deep trouble. We'll run through four significant issues that have arisen, and then give some comments as to why each of them is a problem for him:

• Issue 1: The Court Decision: This is the news that broke yesterday, and that we are able to include because we spent so much time writing about how stupid Tommy Tuberville is, and how sleazy CNN entertainer Jake Tapper is. Much like the Parliamentarian of the Senate, who spends 99.8% of her time flying completely under the radar and 0.2% of her time right in the thick of the action, nobody pays attention to the U.S. Court of International Trade... until they do.
  
  That court, which sits in New York City, has just nine judges. And its responsibility is—you guessed it—dealing with civil actions related to customs and international trade, including tariffs. The Court was asked to consider two different cases, one filed by a consortium of small businesses and one filed by 12 state attorneys general, arguing that Trump's tariffs are not legal. Yesterday, Judges Timothy Reif (Trump appointee), Jane Restani (Ronald Reagan appointee) and Gary Katzmann (Barack Obama appointee) ruled unanimously for the plaintiffs.
  
  The ruling gutted the basis for nearly all of the tariffs Trump has announced. He claimed authority under the International Emergency Economic Powers Act of 1977, and the administration's lawyers argued that not only was that correct, but that this is a political question, and not something for the courts to consider. The judges rejected both elements of that, asserting that this is most certainly a justiciable question dealing with the powers and responsibilities of the branches of government. They also found that there is no emergency, and that even if there was, Congress did not delegate unlimited authority to the president to set tariff rates in the event of an emergency, and that even if they did, that is an impermissible delegation of legislative branch prerogatives.
  
  
• Why This Is a Problem for Trump: By virtue of the ruling, the tariffs are currently in abeyance. At this point, he has two possible courses of action. The first is to appeal the ruling, and to try to get the Court of International Trade overturned. The White House has filed that appeal; it goes to the United States Court of Appeals for the Federal Circuit. However, the administration's argument is pretty weak, and the case is likely to draw unfriendly judges—the Democratic appointees on the court don't like unchecked presidential power, the Republican appointees are free traders, and none of the judges are Trump appointees. On top of that, because the Federal Circuit hears appeals from courts defined by their area of the law and NOT their region, its decisions are nationally binding. So, the Supreme Court is particularly likely to decline appeals, since there's no need to resolve, say, conflicting rulings from the Fifth Circuit and the Ninth Circuit. And even if SCOTUS does hear the appeal, Trump will run into the same unchecked power/free trade dynamic with the Supremes.
  
  The other possibility, which the administration's lawyers are undoubtedly working on, is to find some other statutory basis for Trump to impose tariffs by fiat. However, they surely already did this work, and decided that the International Emergency Economic Powers Act was the best option. So, any backup option is likely to be even weaker, and even less likely to stand up in court.
  
  Meanwhile, all of this means additional months or years of legal wrangling. If Trump was hoping to collect lots and lots of import duties—say, to offset the tax cuts for rich people in the "big, beautiful bill"—then that is not happening right now, and will not likely happen for the foreseeable future. If, on the other hand, the goal was leverage in negotiations with other countries, well, the people who run China or the EU or Canada or Mexico can read the newspapers, and so they know as well as we do that Trump's position is shaky, at best. "Shaky, at best" does not generally equate to "negotiating from a position of strength."
  
  
• Issue 2: The Loophole: This is a little weedy, but in 1988 Congress adopted legislation that established what is known as the "first sale rule." Basically, if a factory in China manufactures a pair of Nikes for $10, and then sells them to Acme Traders for $20, and then Acme Traders sells them to Nike USA for $50, and then Nike USA sells them to American consumers for $200, Nike only has to pay the tariff on the original $10 price.
  
  Again, it's weedy, particularly when you get into the rules that were established to keep companies from grossly abusing the system. For example, each participant in the chain has to be independent of the other participants—Nike can't manufacture shoes in China as Nike Shanghai and then turn around and sell those shoes to Nike USA for ten cents. And when the various links in the chain ARE independent, it can be hard for the later links in the chain to get accurate information about prices from earlier links in the chain. For example, Acme Traders may not be eager to reveal to Nike USA that its markup is 250%.
  
  
• Why This Is a Problem for Trump: If the goal is to collect revenue for the government, then every time that a loophole is exploited, it's less revenue for the government. If the goal is to protect domestic industries, then there are some (probably many) industries where big import tariffs are not going to be nearly as big as Trump thinks they are. And note that this is an American law, so the loophole exists for goods coming INTO the United States. If American Shoe Exporters, Inc. is trying to sell shoes in China or France or Angola, that company may not have the same loophole available in the event that reciprocal tariffs are imposed.
  
  Also, it may not be LEGAL to get around the rules by creating shell companies, but corporate interests are pretty good at chicanery if they want to be, particularly when the stakes are high enough. Trump knows little of history, but we bet the readers of this site are familiar with the corporate trusts of the Gilded Age, which were created to subvert laws against monopolies. It took decades to bust the trusts, and even then it was only achieved with a fully staffed Department of Justice and a series of presidential administrations (Theodore Roosevelt, then William Howard Taft, then Woodrow Wilson) that were willing to go to war. Do you really think the DOGE-ified Trump administration, which also appears to be in the thrall of business interests, would be able to do in 1-2 years what it took Roosevelt/Taft/Wilson something like 20 years to do?
  
  It is true that Trump could demand that Congress change or repeal the 1988 law. However, while the Republican members appear unwilling to challenge him directly, there may be at least a few of them who are not willing to actively rewrite the laws to enable his trade wars. Also, unless such a provision was added to the "big, beautiful bill" (and survived the Byrd bath), then a new trade law would be filibusterable in the Senate.
  
  
• Issue 3: TACO Tuesdays (and Wednesdays, and Thursdays...): This was inside baseball for a week or so, but now it's all over the Internet. The people who run Wall Street just so happen to have noticed that every time Trump declares some harsh new tariff, maybe against China, maybe against Canada, maybe against some unfriendly penguins, the markets take a dive. That means not only the stock markets (and their various indices), but also the bond market, where downturns are really bad for Uncle Sam's bottom line. And every time the bleeding begins, even just a little, Trump backs down and delays [TARIFF X], or announces a "deal" has been struck, or finds some other way to change course, and the markets come roaring back to life.
  
  The dynamic of "the markets drop when tariffs are announced, and rebound when those tariffs are delayed/rolled back" presents certain opportunities for investors, particularly day traders. And the phenomenon is clear enough, and has repeated enough times, that it now has a name: The TACO Trade. TACO stands for "Trump Always Chickens Out." The acronym was reportedly coined by Financial Times columnist Robert Armstrong.
  
  "TACO Trade" not only communicates potentially useful financial wisdom, it's also a double-poke in Trump's eyes, as it paints him as both a coward and an incompetent flip-flopper. And in case anyone missed that latter insinuation, University of Michigan economist Justin Wolfers talked to Barron's yesterday and helpfully pointed out that "there was no BACO trade" and "no CACO trade" (these refer to Joe Biden and Bill Clinton; presumably OACO was too hard to pronounce).
  
  
• Why This Is a Problem for Trump: We see two issues, the one that's more substantive, and the one that Trump probably cares more about. The substantive issue is this: Nearly any goal that Trump might have relies on people, both domestically and abroad, believing the tariffs are for real, and that they will remain in place unless there are BIG concessions, and maybe they'll stay in place even then.
  
  For example, consider the goal that Trump has most often enunciated (even though it's the toughest, and thus least realistic one, to achieve): bringing manufacturing jobs back to the United States. That is a decades-long process. Even today, a majority of manufacturing jobs are performed by robots, and a sizable chunk of the rest of the jobs are for engineers and programmers who build and maintain the robots. The days of 30,000 people all earning a middle-class wage from their jobs building cars for General Motors in Flint, MI, are already mostly gone, and will be even more gone in 10 or 20 years.
  
  That said, there are certainly potential benefits to bringing certain kinds of manufacturing concerns back to the U.S. (like computer chip manufacturing, or maybe even iPhone production, which Trump seems to be particularly obsessed over). However, this would require corporations (and, very possibly, the government) to commit to long-term investments, involving tens or hundreds of billions of dollars over a period of time that will extend beyond Trump's presidency and, in all likelihood, beyond his time on Earth. They need to know that, if they are going to take that leap of faith, the U.S. government is going to back that play, long-term.
  
  The very best option would be for Trump to develop a plan, get buy-in from both sides of the political aisle, and then to go to the business leaders. That ship has sailed; the Democrats are never, ever going to work with him on a protectionist trade policy. Next best would be to lean on the Republicans in Congress to pass a bill establishing a protectionist policy for the next 10 years (and then to hope that the next Democratic trifecta does not kill the bill). However, it is doubtful that the necessary number of Republicans in Congress would support protectionism (you can already count on Sen. Rand Paul and Rep. Thomas Massie, both R-KY, as "no" votes). Unlike Trump, most of them have to worry about getting reelected, and, again, they likely don't want to take ownership of a trade war and a possible recession/depression.
  
  So, Trump is left with executive orders and announcements on Truth Social and making a fist and shaking it at the clouds. It is extremely improbable that this would be enough to convince corporate interests to commit billions of dollars to relocating manufacturing back to the U.S. And if they think that any and all tariff announcements are just a mirage, to soon be wiped out by either a court decision or by Trump's "chickening out"? Then it's impossible.
  
  There is also the second problem here, the one we think Trump actually cares about. He hates, hates, hates to be made the butt of jokes, and that is exactly what is happening here. Just in case there was any doubt, a reporter asked him about "The TACO Trade" yesterday, and Trump blew his stack: "Don't ever say what you say, that's a nasty question. To me that's the nastiest question." He also added that the real problem is that... he's just too tough when it comes to trade. And if you were able to keep a straight face while reading that claim, you are a stronger person than we are.
  
  
• Issue 4: Passing the Buck: We wrote about this before, specifically the case of Walmart. But now, a whole bunch of additional companies have announced their intent to raise prices to cover the costs of tariffs, and to make sure customers know why. Those companies include, in addition to Walmart, Mattel, Best Buy, Ford, Subaru, Procter & Gamble and Adidas.
  
  
• Why This Is a Problem for Trump: Trump, who is prone to magical thinking, seems to have believed that he could bully companies into eating the costs of tariffs, or at least not telling customers where the price increases came from. This was madness. Most of these companies, if not all of them, operate on margins small enough that they cannot eat a 10% increase (much less a 30% or 40% increase) in costs without going into the red. Further, the leaders of these companies, assuming they are publicly traded (and all of these companies are), literally have a legal duty to act in the best interests of the business. If the CEO takes a giant economic hit, or a giant PR hit, to help Trump out, then that CEO is not only not doing their job, they are potentially opening themselves up to legal action.
  
  We will also point out—and this may come as a shock—that corporate interests have been known to use an external excuse, like tariffs, or maybe a pandemic, to raise their prices beyond what is actually needed to make up for the external issue. So, if the tariffs do come back to life, Trump could end up getting the blame for price increases that ARE his fault, and maybe some price increases that ARE NOT actually his fault.

In short, in so many ways, the Trump trade wars have turned into a Trump train wreck. Luckily, given that acronyms are all the rage these days, those have the exact same one. Undoubtedly, if you tell people the TTW have become the TTW, they will know exactly what you mean. And although he sometimes claims not to notice/care, Trump is certainly aware that every time he imposes tariffs, the markets do badly (and, it appears, his approval rating goes down). And every time he backs down, or he is forced to back down, the markets boom (they did yesterday, presumably in response to the decision from the U.S. Court of International Trade). We've never fully understood why he's so obsessed with tariffs, or what he's actually trying to achieve (we've had plenty of theories, mind you, but no actual answers). We wonder if we've finally reached the point that he'll announce a few "beautiful trade deals" and then he'll quietly dispense with all the tariff talk. (Z)