Monopoly Round-Up: The End of U.S. Financial Exceptionalism?

Trump’s tariff roll-out is a mess, as China hits back hard. Plus, GOP money men say Trump is worse than a Bernie Sanders Presidency, the defense budget hits a trillion dollars, and Meta is in trouble. April 13, 2024

– by Matt Stoller

BIG

I have good and bad monopoly news of the week. So much is happening! As usual, I’ll start with a focus on an event that I think was particularly important. This week, it’s what Trump did to pull back from his assertive tariff strategy, as well as China’s response.

Let’s start with the setup. Trump ran on tariffs, and in February, he broadcast his strategy, fostering a slow decline in financial markets. It started with a 20% tariff on Chinese goods, as well as 25% tariffs on goods from Canada and Mexico (those that are not compliant with the new NAFTA, an agreement known as USMCA). Then he really started to execute on April 2, aka “Liberation Day.” Trump presented 10% across the board tariffs, and then additional bespoke ‘reciprocal’ tariff rates to a majority of countries, precipitating both Chinese retaliation with counter-tariffs, and a stock market crash. Usually during such crashes, investors run to the dollar and U.S. government bonds, since these are seen as safe assets, a port in a storm. This time, the dollar and government bonds fell in value, which to Wall Street is quite ominous.

This week, the drama continued. First, the White House issued a 90-day pause on the bespoke set of tariffs above 10% to 67 nations, as well as raised tariffs on China dramatically. And second, the administration published guidance clarifying that Chinese semiconductors, computers, smartphones, and a variety of electronics were exempt from 125% tariffs, though 20% levies put forward in February still apply. Chips had already been exempted in the April 2nd announcement, but smartphones had not. Third, China responded by cutting off critical mineral exports on which our economy relies.

Let’s start with Trump’s ostensible rollbacks. Pulling back on global tariffs for a 90-day pause led to skyrocketing financial markets, and a suggestion of many possible trade arrangements negotiated during that time frame. The exemption of electronics looks like a sop to big tech, most notably Apple, as well as companies like Nvidia, Micron, Google, Dell, and operators running poker websites that assemble server infrastructure in China. It could also be devastating to a strategy to re-shore capacity; if you import inputs and assemble them in the U.S., you have to pay on many of these inputs. However if you import finished products, you get in without additional tariffs. It’s hard to imagine a better strategy for moving more production offshore.

That said, this announcement may not be a real exemption. These products will still be subject to 20% tariffs, and there are other duties, known as Section 232 tariffs because they are executed under a different legal authority, that will likely be imposed on semiconductors, pharmaceuticals, lumber, copper, etc. And even including the backsliding of this week, if you’re purely measuring by policy change, Trump has enacted the biggest shift in trading arrangements since NAFTA in the 1990s. That said, while trade strategists believe much higher trade barriers are permanent, a lot of people on Wall Street are looking at the momentum, watching Trump grow fearful of markets, and assuming that he’ll eventually end up giving up on the trade war entirely.

If you’re confused, don’t worry. Everyone is confused. And the reason is simple. Trump has two narratives at play. The first is the protectionist frame. In this one, tariffs are wonderful, as Trump says, it is “the most beautiful word in the dictionary.” America should extract itself from the poison of “free trade,” and use these tools to rebuild manufacturing capacity and raise revenue. Importantly, in this version of reality, tariffs are permanent. The second is the Art of the Deal frame. In this narrative, tariffs are just a mechanism to get better deals from the rest of the world. Everything, especially tariffs, are negotiable.

There’s a lot more, Trump reverses himself regularly, and his various spokespeople – from Howard Lutnick to Scott Bessent to random rich friends – are all saying different things. Sometimes Trump says the markets going down is fine because America has to “take its medicine,” or that a recession would belong to Biden. Then he’ll note he saw Jamie Dimon on TV freaking out about markets, and he’ll admire the “beautiful” changes that took place in the bond market when he issued a 90 day reprieve. He has at different points said that tariffs will have no exceptions, then noted that some companies will be hit harder than others and he may allow some to import what they need without duties.

Just in terms of where we are, a large swath of Chinese imports are now going to be tariffed at 145% tariffs, and every other country except Mexico and Canada are starting at 10% tariffs, and a 90 day timeline to cut deals before the higher bespoke tariffs apply. This situation is, depending in your point of view, either Trump standing strong, Trump being savvy in cutting deals, or Trump caving to China and the bond markets. Or it’s Trump being an authoritarian wherein he’ll allow those who kiss the ring to benefit.

At any rate, there’s now a pattern of narrative confusion around this administration. Take a big international steel merger. Last year, Nippon Steel sought to buy U.S. Steel, and Biden blocked the acquisition, with Trump breathing fire about it on the campaign trail. Then a few weeks ago, Trump seemed to change his mind, ordering a new national security review. The stocks popped on the news. Now he says he wants investment in U.S. Steel by Nippon Steel, but again that he won’t allow a takeover.

Then there’s immigration. Trump talked up his desire to have mass deportations of undocumented immigrants, and his supporters have expressed how important that is for increasing American wages because of how undocumented labor fosters a race to the bottom in working conditions and pay. This week, in response to an outcry from affected industries, Trump said he might modify that plan and allow hotels and farms to keep employing those workers. I don’t want to go into a laundry list of changed policies, I’ll just note that there is a substantial amount of new confusion about what Trump wants.

So, what are the consequences?

The first is recession. I noted a downturn as a likely outcome in early March, and consumer sentiment has only worsened since. Large numbers of businesses are canceling orders from China, and many will not survive. Even Wall Street titans and CEOs are saying we may be in a recession. Uncertainty makes for good headlines, but it’s bad for investment and planning. It’s worse for small business than big business, because a small business owner usually has less time and financial stability to manage unpredictable changes. It doesn’t help that the administration is slashing the Small Business Administration head count by 43%, as the SBA, which was founded by Wright Patman, is supposed to support small businesses in times like this. So businesses are pulling back on investment, and consumers are as well. That’s not true across the board, of course. And the consumer price index cooled, which is good. But I’m pessimistic.

The second is a pullback in investment in factories. There are some notable high-profile announcements, like that of Novartis putting $22 billion into U.S. production, but these are mostly politically connected firms trying to get something and making easily broken promises for future year spending. There are a lot more companies that are giving up on production, including in important future industries, because there’s no capital or certainty.

The third is a potentially devastating response from China. Today, China cut off the supply of rare earth minerals and magnets to the U.S. These products go into a host of industrial uses, from automobiles to aerospace, so this move potentially cripples our economy. China is a monopolist, which is something we’ve known about for fifteen years but have done nothing to address, because it involves making things instead of generating high financial returns. Trump obviously didn’t prepare for this counter-move, even though it was incredibly obvious and has been discussed by the Pentagon for years. China even threatened it in 2019, and actually cut off Japan in 2010.

And the fourth is that global investors are beginning to see the U.S. as a place where their money may no longer be safe. As I noted above, the response of investors to turmoil is usually buy dollars and U.S. government bonds, which finances our trade deficit and government budget deficit. This time, they sold those bonds. The dollar fell in value, and 10 year interest rates went up. No one knows what this shift means, or what a world without the U.S. as the global banker would look like, but the U.S. strategy since the 1970s has been to undermine U.S. domestic production in order to make the stock market go up.

It’s perhaps useful to move on from such a model, but there are good ways and bad ways of ending it. It’s not clear what Trump is doing, but whatever he’s doing is happening in an abrupt and pointlessly destructive way. Then again, it’s also possible he got scared, and it’ll all get rolled back. Or that China will just force us to back down, because we literally do not have the capacity to remain a modern economy without their products. In that case, we’ll just continue to slide into poverty, becoming a commodity supplier in the Chinese century.

It’s possible we might look back at the first 100 days of the Trump administration as the analogy of the 1956 Suez crisis, where Eisenhower forced France and UK to stop an invasion of Egypt by refusing to give them access to dollars and oil. That was the moment when the UK had to accede to American hegemony. Except this time, it would be the Chinese politely refusing to send the U.S. the magnets and materials we need, unless we make a similar acknowledgment of geopolitical arrangements.

I wish I didn’t have to end this observation on such a grim note. Many of us have been warning of the American trajectory for a long time. I started to observe the problem with industrial production in 2011, but others saw it much earlier. Maybe this moment will serve as a real wake up call around how the oligarchy running our politics is short-sighted and destructive, when nothing else really has. At any rate, the future is uncertain, but the risks today are significant.

More detail at BIG . . .