Accelerating Behavior Modification

For several weeks legacy and social media have been screaming about Trump's supposedly reckless tactics of threatening draconian tariffs on everyone including our staunch allies, Canada, Mexico and the European Union (EU). What no one mentions is that this bombastic verbiage is historically communicated behind closed doors.

Trump has promised transparency and has delivered it masterfully. Trump has refreshingly laid bare to the public the real politik that global trade is nothing more than a street fight of commercial existential importance devoid of diplomatic soft language which is now being streamed live.

The purpose of Trump's tactics is to accelerate behavior modification of countries and organizations that are experts at dragging their feet until a more "amenable" US leadership assumes office in order to continue to avoid responsibility and accountability to their agreements.

Unlike actual military wars, these trade issues can be resolved with a stroke of a pen to be effective or suspended immediately.

US Exports to China

Mainstream and social media incessantly harp on the preponderous amount of goods that we import from China, but rarely how much and which products the US exports to China.

The link to the following chart entitled Which Products Does the US Export to China, provided by the US International Trade Administration, gives an overview and changes since 2023.

U.S. IMPORTS

The European Union

The link to the following chart entitled Share of EU Imports by State from the EU provided by the Census Bureau and CNBC, indicates that in 2024 the goods imported by the EU was $600 billion. A comprehensive US dollar breakdown can be found in the aforementioned link.

The following states depend on almost 50% of EU imports: Puerto Rico, Indiana and North Carolina.

The top 3 EU imports are:

• Motor vehicles
• Pharmaceuticals: critical items include surgical & medical instruments, medical devices (CRT Machines), vaccines, hearing aids and artificial joints
• Crude oil

Present-day the US is battling high EU tariffs whose main components include:

• Unfair taxation of US firms
• Europe's Value Add Tax (VAT)
• Potential digital services taxes are under consideration

This explains why there are few, if any, new significant American business investment in Europe even for American mega-corporations, that has persisted for decades.

Mexico & Canada

The link to the following chart entitled U.S. Import Dependence on Canada and Mexico, provided by the US International Trade Administration (ITA), an agency in the US Department of Commerce indicates the shared percent of imports from Canada and Mexico.

U.S. TRADE LEVERAGE

The US's biggest trading partners are China, Mexico and Canada and receives 43% of our total annual imports from these three countries. Not surprisingly resource-rich Canada and Mexico share our border and are easily accessible. As the world's largest importer makes it a critical market for China, the largest manufacturer and exporter in the world with low-cost labor.

The mainstream media presents a macro-perspective on potential trade wars and tariffs with selective high-profile commodities and goods.

A GAME OF LEVERAGE

The following charts provide a more detailed and nuanced visual of how each state is impacted by trade with the EU, Canada, Mexico and the rest of the world.

The link to the following chart entitled How Much Leverage Does the US Have in the New Trade Wars provided by UN Comtrade.

POLITICAL SIDE EFFECTS

Political Popularity Boosts

Ironically Trump's draconian tariff talk has triggered strong nationalist unity across the political spectrum in many countries. For example, recently Mexican President Claudia Sheinbaum received a massive approval boost for "standing up" to Trump.

Nonetheless, foreign leadership is well aware that the Trump administration's tariff threats is a wake-up call to change their practices to match the agreed upon trade agreements which they've flouted for years.

Domestic Market Impacts

Perhaps it's coincidence or a favorable byproduct for Trump, but the rough trade war talk and the unconventional statement by Trump that the possibility of a recession is not out of the question, shocked the markets into correction territory.

The market correction has deflated a frothy market in order to bring the bond & equity markets more in line with the economic fundamentals. A market which closely hews to the fundamental establishes a normal baseline rather from speculative-driven Icarus-level heights.

Because of the market's precipitous decline, Trump's political adversaries suffered large financial losses. Their unusually massive personal financial portfolios had grown exponentially compared to their modest high-level government salaries.

Rapid Resolution

The application of tariffs, like sanctions, don't have an immediate economic effect. There's a delay in which there are adjustments at each stage of the supply chain. The same applies when tariffs are lifted in the form of residual price effects with goods in inventory and enroute.

Think of it as commercial scar tissue resulting in soft costs and additional insurances in contractual terms & conditions remain.

However, I believe Trump's tariff wars are more akin to skirmishes, more war of words; in other words short-term. A protracted trade war does not serve the Trump administration well. His tactics are carrot & stick on steroids.

By fall, all this tumultuous mainstream chatter will be a memory as the administration tackles other pressing problems.

Conclusion & Takeaways

Trump's "shock & awe" tariff tactic is a gamble that countries will either adhere to earlier agreements or to renegotiate quickly to a "fair & reasonable" re-negotiation.

The US has the overwhelming economic upper-hand since these foreign countries are in a position of political and economic weakness whose threats of counter-measure tariffs are merely a beau geste in face of American economic superiority.

European leadership walks a tight rope by standing up to the US (albeit with speeches) yet risk alienating their constituency and losing already weak legislative support if they fold to American pressure.

With respect to China, although President Xi has a firm grip, he faces severe deflation which has triggered growing social unrest. For this reason, numerous economic indicators are no longer published and the remaining ones provide questionably growth figures. Most importantly for Xi, he can ill afford to lose face of which Trump is well aware. This is why I believe that trade talks with China will proceed amicably.

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