President Trump’s threat last week that he would slap a 50% tariff on all US imports from the EU by June 1 as talks were not progressing fast enough for his taste was reversed by Monday morning.
The president said he had a “very nice phone call” with European Commission president Ursula von der Leyen and announced the deadline had been extended to 9 July.
That date was already the deadline set in April when the 90-day pause in the 20% tariff rate was announced, making it hard to see what Trump achieved from his threat of increased tariffs on Friday – other than a phone call with von der Leyen.
In fact, Trump’s tactic of announcing huge tariffs and then either pausing them or substantially reducing them has earned a new nickname in the financial and investment markets – the TACO trade, where TACO stands for “Trump Always Chickens Out”.
The thesis is that because Trump announces something spectacular or scary (depending on your point of view) and then backs down when financial markets have a negative reaction, people in those markets should be less concerned about the announcement in the first place. After all, he will always chicken out.
If the 50% tariffs on the EU (or the 145% tariffs on China) are nothing more than a negotiating tactic to put pressure on the other side to come to the table, or pick up the phone, then they can be safely ignored by investors and exporters.
Roadblocks
However, this theory ignores the fact that Trump has already put real roadblocks to trade in place. While the 20% tariff on imports from the EU has been paused for 90 days, the 10% levy introduced on so-called “Liberation Day” remains in place.
Following the deal with China, the 145% tariffs are off the table, but a 30% rate is in place, and China’s reciprocal 10% rate is also a feature of trade across the Pacific now.
Trump’s 25% tariffs on imported cars, car parts, steel and aluminium were all introduced in March and April and remain in effect. It seems likely that he will target computer components and pharmaceuticals next for sector-specific measures.
So far there have been no measures particularly targeting US imports of agricultural products, but Trump has talked about the “unfairness” of trade in the sector on numerous occasions.
The problem when analysing the effect of Trump’s policies is that he makes so much noise about implementing measures that would immediately destroy large swathes of international trade that the damaging measures he actually introduces become lost in that noise.
Sam Lowe, partner in international trade at London-based advisory firm Flint Global said this week that “at the end of the [Trump] presidency, I expect the aggregate applied US tariff to be 10-20 percentage points higher than it was at the beginning.
“Within this average, I expect there to be some pretty significant country and product-specific variation. The US will be significantly more closed to international trade than it was on day one.”
As Lowe went on to say, this really matters. Since the end of World War II, the US has been the world’s biggest consumer.
To put some numbers on that, the US economy accounts for around a quarter of global output (measured by gross domestic product (GDP)), with 70% of US output driven by consumer spending. This means that 17.5% of global output is due to US consumer spending.
The dollar’s role
A large amount of that consumption is of imported products including cars, pharmaceuticals and Irish butter and whiskey. For most countries where imports are larger than exports – also known as running a trade deficit – the balancing factor tends to be the country’s currency.
If a country is spending more on imports, then it is effectively exporting its own currency. This will increase the supply of its currency in global trade, which in turn through simple supply and demand will reduce the value of that currency.
This reduction in value of the currency will make imports more expensive (as suppliers will want to be paid in their own currency) which, in theory, will reduce the level of imports and in turn reduce the trade deficit.
However, this has not been the case with the US as the global economy has for decades used the dollar as the currency for trade.
This has meant that the world has needed a supply of dollars, which is mostly provided for by the US consistently running trade and budget deficits.
This also means that the US dollar has maintained its purchasing power for American consumers despite their huge level of spending on imports.
President Trump’s policies are adding a roadblock to that spending on imports. For any other country, a reduction in spending on imports will lead to an appreciation of the country’s currency (as it is exporting less of it), but in the case of the dollar, we can see the opposite happening, with the currency down about 10% so far this year).
The trend is also being driven by short term factors such as fears about economic growth within the US and the potential size of the country’s budget deficit which will lead to a jump in borrowing.
Other pretenders to the crown of global reserve currency have seen what is happening to the dollar, and the effects Trump’s policies are already having, and are putting themselves forward for a greater share of global transactions.
China has pushed for an increased role for its currency (the yuan) in trade since the 2008 financial crisis. The current situation has led to a redoubling of those efforts, particularly in Asia and the Middle East.
In a recent speech, European Central Bank president Christine Lagarde said that “the ongoing changes create the opening for a ‘global euro’ moment,” adding that “the euro will not gain influence by default – it will have to earn it.”
Interestingly, Lagarde said that moves to increase international use of the euro should be backed up with greater military strength. She said that investors “invest in the assets of regions that are reliable security partners and can honour alliances with hard power”.
For now, the dollar still dominates global trade, involved in more than 80% of international transactions, with the yuan and the euro both at less than 7%, so the move away from the currency will likely take some time, if it is to happen at all.
However, right now all signs point to further weakening of the US currency, something which has the potential to hit exports to the US as much as an increase in tariffs.
In Brief:
Trump tends to back down from exorbitant tariff threats. Investors have started to pay less attention to his declarations. The damage he is doing to trade should not be underestimated. China and Europe are renewing efforts to de-dollarise the global economy.A weaker dollar will hit Irish exports to the US.
President Trump’s threat last week that he would slap a 50% tariff on all US imports from the EU by June 1 as talks were not progressing fast enough for his taste was reversed by Monday morning.
The president said he had a “very nice phone call” with European Commission president Ursula von der Leyen and announced the deadline had been extended to 9 July.
That date was already the deadline set in April when the 90-day pause in the 20% tariff rate was announced, making it hard to see what Trump achieved from his threat of increased tariffs on Friday – other than a phone call with von der Leyen.
In fact, Trump’s tactic of announcing huge tariffs and then either pausing them or substantially reducing them has earned a new nickname in the financial and investment markets – the TACO trade, where TACO stands for “Trump Always Chickens Out”.
The thesis is that because Trump announces something spectacular or scary (depending on your point of view) and then backs down when financial markets have a negative reaction, people in those markets should be less concerned about the announcement in the first place. After all, he will always chicken out.
If the 50% tariffs on the EU (or the 145% tariffs on China) are nothing more than a negotiating tactic to put pressure on the other side to come to the table, or pick up the phone, then they can be safely ignored by investors and exporters.
Roadblocks
However, this theory ignores the fact that Trump has already put real roadblocks to trade in place. While the 20% tariff on imports from the EU has been paused for 90 days, the 10% levy introduced on so-called “Liberation Day” remains in place.
Following the deal with China, the 145% tariffs are off the table, but a 30% rate is in place, and China’s reciprocal 10% rate is also a feature of trade across the Pacific now.
Trump’s 25% tariffs on imported cars, car parts, steel and aluminium were all introduced in March and April and remain in effect. It seems likely that he will target computer components and pharmaceuticals next for sector-specific measures.
So far there have been no measures particularly targeting US imports of agricultural products, but Trump has talked about the “unfairness” of trade in the sector on numerous occasions.
The problem when analysing the effect of Trump’s policies is that he makes so much noise about implementing measures that would immediately destroy large swathes of international trade that the damaging measures he actually introduces become lost in that noise.
Sam Lowe, partner in international trade at London-based advisory firm Flint Global said this week that “at the end of the [Trump] presidency, I expect the aggregate applied US tariff to be 10-20 percentage points higher than it was at the beginning.
“Within this average, I expect there to be some pretty significant country and product-specific variation. The US will be significantly more closed to international trade than it was on day one.”
As Lowe went on to say, this really matters. Since the end of World War II, the US has been the world’s biggest consumer.
To put some numbers on that, the US economy accounts for around a quarter of global output (measured by gross domestic product (GDP)), with 70% of US output driven by consumer spending. This means that 17.5% of global output is due to US consumer spending.
The dollar’s role
A large amount of that consumption is of imported products including cars, pharmaceuticals and Irish butter and whiskey. For most countries where imports are larger than exports – also known as running a trade deficit – the balancing factor tends to be the country’s currency.
If a country is spending more on imports, then it is effectively exporting its own currency. This will increase the supply of its currency in global trade, which in turn through simple supply and demand will reduce the value of that currency.
This reduction in value of the currency will make imports more expensive (as suppliers will want to be paid in their own currency) which, in theory, will reduce the level of imports and in turn reduce the trade deficit.
However, this has not been the case with the US as the global economy has for decades used the dollar as the currency for trade.
This has meant that the world has needed a supply of dollars, which is mostly provided for by the US consistently running trade and budget deficits.
This also means that the US dollar has maintained its purchasing power for American consumers despite their huge level of spending on imports.
President Trump’s policies are adding a roadblock to that spending on imports. For any other country, a reduction in spending on imports will lead to an appreciation of the country’s currency (as it is exporting less of it), but in the case of the dollar, we can see the opposite happening, with the currency down about 10% so far this year).
The trend is also being driven by short term factors such as fears about economic growth within the US and the potential size of the country’s budget deficit which will lead to a jump in borrowing.
Other pretenders to the crown of global reserve currency have seen what is happening to the dollar, and the effects Trump’s policies are already having, and are putting themselves forward for a greater share of global transactions.
China has pushed for an increased role for its currency (the yuan) in trade since the 2008 financial crisis. The current situation has led to a redoubling of those efforts, particularly in Asia and the Middle East.
In a recent speech, European Central Bank president Christine Lagarde said that “the ongoing changes create the opening for a ‘global euro’ moment,” adding that “the euro will not gain influence by default – it will have to earn it.”
Interestingly, Lagarde said that moves to increase international use of the euro should be backed up with greater military strength. She said that investors “invest in the assets of regions that are reliable security partners and can honour alliances with hard power”.
For now, the dollar still dominates global trade, involved in more than 80% of international transactions, with the yuan and the euro both at less than 7%, so the move away from the currency will likely take some time, if it is to happen at all.
However, right now all signs point to further weakening of the US currency, something which has the potential to hit exports to the US as much as an increase in tariffs.
In Brief:
Trump tends to back down from exorbitant tariff threats. Investors have started to pay less attention to his declarations. The damage he is doing to trade should not be underestimated. China and Europe are renewing efforts to de-dollarise the global economy.A weaker dollar will hit Irish exports to the US. 
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