The Weekly Sift

Wednesday, Trump announced sweeping tariffs against almost every nation on Earth, with Russia being a notable exception. The plan included a 10% tariff on all imports, supplemented by specific tariffs ranging up to 50% on a long list of nations (including a few islands that are uninhabited).

He pitched the tariffs as “reciprocal”, i.e., matching our tariffs on imports to the tariffs other nations have put on our exports. However, no one can find nations whose tariffs are anything like the ones Trump is imposing in return. In his announcement, Trump also referred to “non-tariff barriers” to American exports. He framed any trade deficit as the result of some form of unfairness to American exports, which the new tariffs attempt to equalize.

As a result, when people finally figured out how the tariffs were being calculated, the tariff rate was simply half of the trade deficit with that country as a percentage of that country’s total exports to the US. So it’s a function of that country’s trade surplus/deficit with the US, not any specific unfairness in its tariffs or laws.

That’s how the highest tariff rate wound up falling on Lesotho, a tiny poor country surrounded by South Africa. Lesotho makes denim for jeans and also exports diamonds and a few other commodities. Few Lesothans can afford imported goods from the US.

The administration has made three cases for its tariffs, which The Atlantic’s Derek Thompson points out contradict each other. The tariffs are supposed to

• Raise $6 trillion in revenue (if you believe Trump aide Peter Navarro).
• Restore free trade by incentivizing other nations to negotiate away their trade barriers against us (if you believe Palmer Luckey).
• Bring manufacturing jobs back to the US (if you believe Stephen Miran, the chair of the Council of Economic Advisers).

In order to raise revenue and increase US manufacturing, the tariffs have to last for many years, which they can’t do if they are a negotiating ploy to lower other country’s tariffs and trade barriers. Similarly, no tariff is going to restore coffee production to the US, because our climate doesn’t lend itself to coffee production.

Global stock markets reacted to the tariffs by collapsing. If you’re an investor yourself, you may not realize how unusual this is. A market truism is “Buy on rumor, sell on news.” In other words, you make your moves in anticipation of events, not in reaction to them. Once a thing is announced, you close the position you based on it and look for the next thing you think is going to happen.

So the widespread expectation, as the world awaited the tariff announcement, was that the stock market would get a small bounce out of it. Rumors of tariffs had been depressing stock prices for months, but once the news was out, investor attention would shift to something else. But the actual tariffs turned out to be far worse than anything investors had anticipated, so the reaction was down instead of up.

And boy, was it down. The S&P 500 lost more than 10% of its value Thursday and Friday, and opened sharply down again today.

So if the market isn’t anticipating tariffs any more, what is it anticipating? The recession these tariffs are expected to cause. J. P. Morgan is one of many forecasters now predicting a recession. Morgan economists anticipate the unemployment rate rising to 5.3%.

But no one knows how far the predicted downturn will go, because recession fears can be self-validating. People afraid of losing their jobs tend not to spend as much, which in turn causes other people to lose their jobs. Businesses expecting a downturn will cancel expansion plans and emphasize cost-cutting.

The administration’s response to these fears has been a no-pain/no-gain message that was totally absent from Trump’s 2024 campaign. On the campaign trail, Trump kept talking about positive change that would happen “very quickly” or “on Day One“.

But now, Treasury Secretary Scott Bessant is talking about a “detox period” where the economy breaks its addiction to government spending.

The right-wing news bubble is doing its best to help push the administration’s story, or just to distract its viewers from the bad news. When the market started crashing Thursday morning, I channel-scanned and observed the same thing The Daily Show saw:

CNN: Stock market plummets
MSNBC: Stock market craters
Highlights for Children: Stock market down big
FOX News: New info about alleged cover-up of Biden’s decline

Fox also focused on some silly thing Alec Baldwin said, as if he were the voice of the Democratic Party. Fox also removed the stock ticker from the corner of its screen.

So the 30% or so of the country that is die-hard Trump is likely to keep drinking the kool-aid. But the additional 20% that won the election for him is experiencing considerable cognitive dissonance and even buyers’ remorse. To them, Trump was a great businessman who would handle the economy better than Biden did. That image is hard to sustain as you worry about your job, watch prices of foreign-produced goods rise, and see your 401(k) investments sink.