Tariff Turbulence: What to Watch, Including Possible Constraints

Despite the significant market drawdown, the White House has remained defiant that the 10% “baseline” U.S. tariff on all countries that came into effect on Saturday and the upcoming “individualized reciprocal higher tariffs,” which are set to come online on Wednesday (9 April) on 60+ countries, are here to stay. This would raise the effective average U.S. tariff rate to approximately 25% (up from roughly 3% previously) if all tariffs stick.

Indeed, over the weekend, U.S. Commerce Secretary Howard Lutnick said that tariffs will remain and will help to “reset the power” of the U.S.; senior White House advisor Peter Navarro claimed that the market would bottom soon and the market “will see a bullish boom”; and President Trump himself said, in response to Asian markets selling off Sunday night, that while he did not wish the market to go down, that sometimes “you have to take your medicine to fix something.”

Still, some in the marketplace are unconvinced. They seem to think this is just posturing – simply a negotiating tactic – and that 1) higher individualized tariffs will not be imposed on Wednesday, and 2) if they are, Trump will pivot quickly to making deals to provide relief.

Base case on tariffs

While we have maintained for a long time that Trump is both transaction man and tariff man and we could see him ultimately making deals to soften the higher individualized tariffs, our view is that: 1) the higher tariffs (e.g., Vietnam at 46%, the EU at 20%, China at 34% in addition to the 20% already implemented) will roll-on as scheduled on Wednesday, and 2) there will not be tariff relief in the very short term.

Going forward, we think that the ultimate destination could be 1) a 10% baseline tariff – at a minimum, 2) higher tariffs on China will remain (up to the 54% tariff rate most likely), and 3) “Section 232” product tariffs that are already on aluminum, steel, and autos, plus those that are forthcoming on lumber, copper, and semiconductors, will remain or be imposed. Additionally, we expect the higher “individualized” tariffs on other countries (e.g., the EU) are likely to stay on for the short term (we believe investors should think more in terms of months, not weeks), but there is more open space for an ultimate deal – at least at some point.

Remember: As we have been writing about since he first came into office in 2017 (Trump 1.0), President Trump – and importantly, the most influential advisors surrounding him in Trump 2.0 – believes what is being said; this is not simply posturing. In 1987(!), in an interview with Larry King, Trump talked about how he was “tired of watching other countries rip off the United States,” and in 1988, on the David Letterman show, he specifically talked about trade deficits being the issue: “If you look at what certain countries are doing to this country … I mean they’ve totally taken advantage of the country. I am talking about trade deficits. They come and talk about free trade. They dump the cars and the VCRs and everything else.” Trump was opposed to NAFTA in 1993 and to China’s accession to the WTO in 2001.

In other words, there is a longstanding and deep-seated ideology that is underpinning these tariffs. Trump has believed the U.S. has been getting an “unfair deal” for decades, and in particular, has viewed the U.S. goods trade deficit as the effective scorecard between the U.S. and the rest of the world. Given the U.S. trade deficit is approximately $1 trillion (according to the U.S. Census Bureau), by that measure, the U.S. is the loser, according to Trump. Not to mention that after Trump 1.0, there was a sense of unfinished business that Trump 2.0 seems committed to finishing.

What to watch for

On Monday, President Trump met with Israel’s Prime Minister Benjamin Netanyahu, where tariffs were likely one of many items on the agenda. Yet there was no immediate deal struck. Given the closeness of the relationship between the U.S. and Israel and the affinity between Trump and Netanyahu in particular, we read this as an indication that any country-specific negotiations are very likely to take time.

U.S. Trade Representative Jamieson Greer will appear on Capitol Hill on Tuesday and Wednesday. Expect Ambassador Greer to get grilled about the higher reciprocal tariffs in particular, and specifically the methodology used to calculate those tariffs, as well as how the White House is thinking about the definition of success and off-ramps from here. But we would be surprised if his messaging is any different from what we heard over the weekend from other advisors – i.e., they are committed to fair deals with trading partners, and until then, tariffs will remain on.

Hill pressure as a constraint?

Over the weekend, we saw a few Capitol Hill Republicans push back on the tariffs publicly (this is in addition to those who are doing so privately); the most pronounced of whom was Senator Cruz (R-TX), who warned of a possible “bloodbath” in the upcoming midterm elections if Trump stuck with the tariffs. This is on the heels of the Senate taking a (forced) vote on a privileged resolution that would have limited the tariffs on Canada, in which four Republicans voted in favor of it (Senators McConnell, Collins, Paul, and Murkowski); while this passed the Senate with a simple majority, it is a nonstarter in the House.

For the most part, however, Congressional Republicans seem to be united behind the president on the tariffs (even if some may be handwringing privately) and are likely to give him the political room for a while, at least. Keep in mind that even if Republicans totally opposed Trump on trade, they have few levers anyway, since Trump could simply veto anything that is passed to limit his authority (we assume that there would not be two-thirds of both chambers to overturn that veto, and if there is, then we have really jumped the shark).

Other possible constraints on trade policy

Of maybe all of the possible constraints, President Trump’s popularity may actually be the one that ultimately binds him, but we are not close to that now. Indeed, Trump has an approximate 48% approval rating (according to RealClearPolitics averages) and a −2% net approval rating (i.e., 50% disapprove of him). While this is on the lower end relative to other presidents at the same time in their administrations, it is much higher than Trump’s approval rating in 2017. Additionally, while Trump – like any politician – cares about his popularity, he may care less or have a higher threshold than he did under Trump 1.0 given he is not running again (which he is not, by the way; the 22nd Amendment is very clear on this).

What about the “Trump put?” We had been skeptical of the assumption in the market that Trump cared as much or more about the equity market as he did about seeing his trade policy through, and what we have seen up to now is there is a commitment to hang in there with tariffs even if the market enters bear territory. Indeed, on Monday morning (7 April), Trump tweeted on Truth Social that people (specifically Republicans it would seem) should not be “PANICANS” – they should not panic and instead be “courageous and patient.” While we assume there is some limit to this ultimately, it does not appear that we have reached it.

There has also been some consternation about how Trump imposed these tariffs – using the emergency authorities afforded under the International Emergency Economic Powers Act of 1977 (IEEPA) – which have never been used for tariffs. We expect that the White House will see legal challenges when higher tariffs roll-on this week, but typically, courts have been more sympathetic with the president on what are deemed national emergency concerns. This Supreme Court has been skeptical about expanding powers, but assuming this would take a while to be adjudicated, we don’t think people should hang their hats on the court system slowing this down as of now.

We expect a quick pivot to tax cuts

We think the most likely viable short-term strategy of the White House is to lean into a bigger tax cut – and fast. Indeed, over the weekend, the Senate took a major procedural step, which will help to set the guardrails of the ultimate tax package; while the Senate version looks quite a bit different from the one that the House passed recently and will need to ultimately be reconciled, it does suggest that we could see bigger tax cuts and fewer spending cuts.

Indeed, that budget resolution points to a higher chance of two outcomes: 1) the 2017 Trump tax cuts could be made permanent (this will take some procedural magic and may require firing the Senate parliamentarian, but no matter), and 2) we could see additional net tax cuts of up to $1.5 trillion over ten years, which are likely to be front-loaded. While the Senate version could also include some spending cuts to Medicaid and other areas, our view is that especially if/when the economy slows, we are likely to see a bigger tax cut with much smaller spending cuts than what the House is inclined to do.

This, of course, could mean higher deficits steady-state, although where the deficit lands will be predicated on what happens to the economy as well as to tariff revenue. As of now, deficits are on track to be around ~6.5% or 7% of GDP, according to the Congressional Budget Office.

Bottom line

While there are likely to be head-fakes and twists-and-turns, we think people should focus on the final destination, which is higher tariffs. As a base case, we assume a 10% universal tariff on all countries, higher tariffs on China, Section 232 tariffs, as well as higher country-specific tariffs for the time being while negotiations ensue, although those may take longer than what folks hope or expect. At the same time, we would expect the White House to pivot to talking about and pushing for tax cuts, which we expect will be bigger than what they may have been otherwise.