The madness of 'King Trump'
U.S. President Donald Trump's long-awaited reciprocal tariff announcement exceeded even the most cynical forecasts. The Trump administration not only weaponized trade but launched a worldwide assault by imposing tariffs on its political foes and allies alike. The impact on the financial market was immediate, with even the revered U.S. stock market seeing its steepest losses since the pandemic. The list of countries hit with the highest tariffs is noticeably crowded with Asian countries, especially developing economies. Countries like Vietnam and Cambodia were slapped with tariff rates of 49 percent and 46 percent, respectively, much higher than the tariffs imposed on Trump's public enemies like China, at 34 percent, and the EU at 20 percent. The better news was for Canada and Mexico, which felt the brunt of an earlier attack from Trump, and were this time exempt from the tariff list.
However, perhaps the greater controversy is not on the severity of the tariffs but on how the tariffs were formulated. The calculations were based on so-called tariffs charged to the U.S., but the computation simply takes the ratio derived from the trade deficit with each country as a percentage of its imports from that country. The final reciprocal tariff is derived by dividing the percentage by half, which Trump calls "generous discounts." In essence, what the White House tagged as the "estimate of tariffs on U.S. goods" are not tariffs at all, but a measure of trade deficit with each country. As a result, developing countries that have no need or cannot afford to buy American-made goods were hit with the highest rates.
Up until last week, the concept of reciprocal tariffs was widely understood as targeting countries with asymmetrical tariffs with the United States. Targeting trade deficits with each country is proof of the Trump administration weaponizing trade rather than seeking fair trade. With its flawed methodology, the Trump administration's promise of using tariffs to create American jobs is proven false. If the policy was aimed at creating jobs, the focus should be on countries with competing industries, which the U.S. is seeking to bring onshore. Instead, the administration is attacking countries with trade deficits and seeking concessions that Trump has made a priority.
The focus on trade deficit in this simplistic manner likely originates from Trump's inherently flawed thinking that global trade is a zero-sum game — whatever its trade partner concedes, the U.S. wins by the exact amount. The assumption is that through bilateral negotiations and having each country reduce its trade deficit with the U.S., those dollars will translate to U.S. jobs via onshoring. The same logic seems to be behind the baseline tariffs imposed on countries with which the U.S. has a trade surplus. For traditional U.S. allies like the U.K. and Australia — with which the U.S. has had a consistent trade surplus — the 10 percent tariff sends a chilling message, signaling not only economic harm but also damage to political alliances.
One possible explanation for this illogical tariff methodology could be that it opens the spectrum of future negotiations on factors other than trade.
Since the tariffs were not soundly constructed, Trump can now change them based on any mix of political, financial and even personal motivations. If Trump is looking to inflict retribution on a personal level, the tariff regime and its subterfuge methodology provides a platform lacking accountability and transparency, which is consistent with his fake news strategy. One cannot escape the parallel between the latest tariff regime from the U.S. and China's draconian policies of the past few years. Using weaponizing trade has been a helpful strategy for China to aid its political goals for over a decade, and now the Trump administration is taking that concept to a global level.
In the coming months, countries will individually respond with a varying mix of tariff retaliation and concessions. China has already made its intention clear by retaliating with exactly reciprocal 34 percent tariffs on U.S. imports. In military language, it is what they call a "proportional response," which is appropriate since China is positioning itself as the superpower on the other side of the global trade war. For other countries, the immediate response is to seek alternative export destinations. The U.S. stock market panic since the tariff announcement reflects investor concerns about the growing recession risk and eventual inflation that the new tariff regime will inflict on U.S. consumers and companies.
While he has repeatedly characterized his tariffs as "permanent," we know by now that nothing is permanent with Trump, as he has consistently proven to change his policies on a whim. The greatest uncertainty, therefore, lies with Trump's personal agenda and penchant for mixing personal motives into policy. The pace and scale of the economic and financial impact will ultimately depend on the response of U.S. trading partners, who will decide between retaliation, concession or any mix of the two.
Never has such an important policy been constructed with such incredible ignorance and naivete. Trump's target list of countries and individual tariffs reveals more than anything that Trump is no policymaker or analyst. If the flawed calculations are a deliberate maneuver to exert maximum confusion and minimum transparency, then the risks extend far beyond a recession or a financial bear market.
Peter S. Kim is managing director at the KB Securities. The views expressed here are his own.