NWP Monthly Digest | February 2025
What a weekend! I mean, seriously, there is a lot to unpack so far on the actions being taken by the White House just since inauguration, but this weekend takes the cake.
I’ve been wanting to write about a few things “I think I think” in regards to what’s been happening in the economy and the markets, but this weekend put a lot of that on hold. There is but one thing that is on everyone’s mind right now.
Tariffs
Let’s start with the headline news. Trump instituted tariffs over the weekend on Mexico, Canada, and China, sparking a colossal global trade war the likes of which haven’t been seen in over 100 years.
And there is good reason that we haven’t seen actions like this in a long time: they don’t have a positive effect on the economy. Certainly, tariffs are not new and plenty of tariffs have been enforced over the years in a tactical way, meaning they have been targeted to certain industries or products (steel and Chinese electric cars are very recent examples). But sweeping tariffs on entire countries, specifically our allies and closest neighbors? No, we haven’t seen that.
President Trump, through the use of executive order, issued tariffs of 25% on all goods imported from Canada and Mexico, and 10% on goods imported from China to begin on February 1st. Normally, Congress would have to be involved, but these tariffs are being issued due to a national security emergency from the threat of fentanyl coming into the country across the borders both north and south. Their impact is generally agreed upon by everyone, President Trump included, who stated that the tariffs on Mexico and Canada would cause pain to the people of the United States. Prices will rise on almost everything.
Approximately 90% of our fresh vegetables imported from outside the U.S. come from Mexico and Canada. Hopefully, it doesn’t take too long to connect the dots there, but if you were hoping to have lower grocery bills, it ain’t happening anytime soon.
Chart courtesy of Callie Cox, Ritholtz Wealth Management, and data courtesy of the US Census Bureau
What would be the rationale for taking both of our top trading partners to the negotiating table? Well, that depends on who you ask…or, more specifically, how you ask the question. The Trump administration has said countless times that they intend to use tariffs to 1. Negotiate with other countries and 2. To raise revenue for the US Treasury. Number 2 is often linked to tax cuts, with Trump saying several times that tariffs will “make our nation very rich”. Some devout believers of tariffs actually believe that they could offset the need for federal income tax.
But don’t get your hopes up, because if we believe reason number 1, then reason number 2 becomes a long shot. And the majority of people who follow this stuff closely believe in reason number 1.
As evidence, an update as of this morning, Monday, February 3rd: Mexico’s President, Claudia Sheinbaum, agreed to send 10,000 troops to defend the border against drug trafficking and Trump has agreed to suspend the tariff on Mexico for 30 days.
So, what is the end-game here? It’s really hard to figure out. We have a huge trade deficit with China, and we’ve known this for years. So a 10% tariff on China at least makes sense if you want to start to reduce our trade deficits. But why Canada? This one is the most difficult to understand. They are solid and loyal allies, our trade deficit with them is 7x less than that of China, and we have hardly any issues with their border, which is responsible for less than 1% of the fentanyl entering our country.
For some strange reason, Trump sent out a post on his own platform, Truth Social, yesterday morning boasting that the 25% tariff against Canada will “destroy their economy” and that their citizens would be better off if they became the “beloved 51st state” of the United States of America. So, is there a reason #3 for the tariffs? Is Trump becoming more imperialistic? I’m not sure, and neither is anyone else. Here is a great snippet from John Authers this morning:
“Why this is a bad idea? The greatest objection to this plan is that it’s stupid. This is true even if we accept the following:
Globalization has gone too far and the will of the populace is plainly to reverse it.
Trump was elected as Tariff Man who would adopt protectionist policies.
Tariffs can be used as a diplomatic threat and then withdrawn, as shown in the row with Colombia.
The US has a trade deficit with both countries.
Fentanyl poses a serious threat to both health and law and order in the US.
Adam Smith and David Ricardo wrote centuries ago, and their arguments for free trade are now sterile and academic.
US law and the Constitution don’t stop the president from doing this; and
The USMCA trade agreement — signed by Trump himself — doesn’t stop him from doing it, either.
I don’t agree with all of these statements, but even if we accept them, this policy is dumb. In no particular order:
If fentanyl is really driving this, then putting tariffs on Canada isn’t even in the top 100 policies that might deal with it.
If there is concern over the border, then a measure that could drive Mexico into recession and force a new “invasion” of desperate people looking for work is exactly what you don’t want to do.
Prices go up when supply chains are disrupted. Supply chains with Mexico and Canada are more tightly integrated with the US than anywhere else. Targeting them will maximize disruption, inflation and job losses.
As the US exports a lot to Canada and Mexico, both countries can retaliate most effectively.
Sequencing is important, and it would be wise to get tax cuts on the books (as in Trump 1.0) before trying this.” ~John Authers, Points of Return, Bloomberg
For now, the baseline assumption from Wall Street is that the tariffs are being used to negotiate and will be short-lived, centering around the notion that the rest of the world needs us a lot more than we need them.
Jamie Dimon, CEO of JP Morgan Chase, the world’s largest financial institution, said over the weekend that Americans need to “get over it” when it comes to tariffs and that our national security is vastly more important than slightly higher prices.
David Kelly, Chief Global Strategist at JP Morgan Chase Asset Management, has estimated that the overall impact on the cost of goods for Americans from just these tariffs (not counting on tariffs to other countries or the retaliatory efforts from China, Mexico, and Canada) will raise prices by 1%. That may not seem like a lot, but just understand that reducing inflation from 3% to the target of 2% has taken a very long time with the Fed in restrictive monetary policy mode, and adding 1% to that number won’t make them happy.
I spent last night listening to Robert Lighthizer, a Trump White House consultant and one of the biggest fans of tariffs, talk about the strategy on 60 Minutes. It was enlightening and educational, and it almost could make you believe that all of this is necessary. One major point he brings up is that enacting tariffs on China, for example, to help reduce the amount of things we buy from them, is exactly what they are doing to us. Lighthizer claims that the gigantic trade deficit with China has a cost to the US economy and it “could be well over $1 trillion a year”. I’ve never heard any other economist come close to those estimates, but I am in agreement that China is less than an honest trading partner. Canada and Mexico, however? I have even more doubts.
For now, I am in agreement with the theory that these are negotiating tactics and they won’t be in effect for very long. Already, the stock market has reversed a lot of it’s opening losses from this morning as the rhetoric, at least toward Mexico, is softening.
The last item I’ll leave you with is how different the U.S. economy is than it was 100 years ago, when tariffs were used far more aggressively. This quote from Cullen Roche (his piece is linked below) sums up my thoughts on things very succinctly.
“I am sorry to be the bearer of bad news, but you can tariff everything in the world and nothing is stopping the fact that you won’t turn the largest developed tech economy in the world into an emerging market manufacturing economy. It’s never happening. The jobs aren’t coming back. Ever. So you can tariff this and tariff that and all it will do is add to corporate, consumer, labor and shareholder costs while creating the sort of red tape that we should be stripping down.” ~Cullen Roche, Discipline Funds
Things We’re Reading and Enjoying (specifically for this newsletter)
Let’s Talk About Tariffs, by Cullen Roche, Discipline Funds Blog
So. Tariff Man is back and apparently more serious than ever. At least for now. Let’s talk about the good, the bad and the ugly. I hope this doesn’t sound political, but that’s probably unavoidable. So if you have hate mail please send it to Jerome Powell at jpow@moneyprinter.net. He had nothing to do with writing this, but he’s a logical scapegoat for all things finance.
First, let’s talk about how tariffs work. When the USA imposes a tariff the importing corporation pays a fee at the border. The foreign country isn’t the one paying the fee. The corporation pays the import fee. And this fee operates like a corporate tax. And corporate taxes aren’t paid by corporations because corporations pass on their costs to actual people.
The Investment Implications of a Trade War, by David Kelly, Chief Global Strategist at JP Morgan Chase
We estimate that the U.S. imported $1.36 trillion in goods from Canada, Mexico and China last year and that the tariffs announced by the President would have implied an average import tax of 19% on those goods. Under the crude assumption that a 19% increase in prices results in a 19% decline in purchases (either through lower consumption or substitution of other goods or suppliers), the tariffs announced could have raised $206 billion.
Last year, total nominal consumer spending was $19.8 trillion, so if all of the price increases were passed on to consumers, it could be expected to increase the consumer price index by just over 1%. This, of course, assumes that foreign manufacturers, importers or retailers don’t absorb some of the cost.
Robert Lighthizer Interview, 60 Minutes
Trump’s former trade chief on how tariffs affect the economy, why he says the U.S. needs them.
Economists say tariffs can increase prices for consumers, but Robert Lighthizer, President Trump’s former trade chief, argues they’re necessary.
“There is nothing noble about being superior to your fellow man. True nobility is being superior to your former self.” - Ernest Hemingway
