A finest guess on what’s actually taking place with the Trump reciprocal tariff headlines

Reuters tossed a hand grenade into markets today with a report that Trump could announce reciprocal tariffs as soon as today. Let’s sort this out.

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The US has low tariffs rates and most other countries have higher rates. The idea is that the US would put tariffs on those countries equal to what they charge. This is something Trump campaigned on so it’s not a surprise.

A couple points to start:

1) Trump doesn’t have the authority to do this

2) Trump brought this up in discussions with Congress around the budget and paying for tax cuts

3) Congress does have the authority to do this

It’s really tough to find any math that could pay for an extension of Trump tax cuts with tariffs but that’s what Trump wants to do, at least in part. There is going to be a negotiation with Congress because the tax cuts he’s talked about will cost $5-11 trillion over 10 years.

Now I’m not sure what Trump is going to announce Friday (or next week as other reports suggest) but it will be toothless. I’d imagine it’s more of an opening shot across the bow intended to put countries on notice.

What’s especially confusing is that Trump appears to be conflating VAT taxes as tariffs. White House economic advisor highlighted how US companies are paying VAT taxes in Europe but it’s consumers who pay VAT taxes as they are consumption taxes. I’m not sure how you could even begin to calculate a reciprocal reaction to that or implement it.

However silicon valley (which has taken over the government) hates the European idea of a digital services tax and Hassett is also talking about reciprocity in tax structures.

Once you filter out all the confusing noise, I think this is the agenda, according to Hassett:

“What President Trump wants us to do is to come up with a really smart
program that includes trade policy, tariffs and revisions to the tax
code, and he wants us to make it work so America is on a level playing
field again.”

It’s going to be up to Congress to do that.

Some takeaways:

1. Trump is going to threaten a lot of tariffs
2. Congress will likely implement a 10% across the board tariff or some kind of convoluted reciprocity system
3. Trump will fight hard against Europe’s digital services tax
4. All this VAT talk is nonsense but it will be used as some kind of talking point
5. The Trump admin takes the Druckenmiller view that tariffs are like a VAT on foreign-produced goods

So I think what the market should price in is a tax cut extension but it will be very tough to achieve much of what Trump has laid out, given that the US is already running a 7% deficit of GDP.

Today there are some rumblings that Medicare cuts will be used along with tariffs to pay for this but that’s going to be a challenging sell. Moreover, Republicans can only afford to lose 3 votes in both the Senate and the House. One way to pay for these things is to run deficits up even higher but that might fall apart if some real fiscal conservatives decide to block it.

At the end of the day I expect:

1. Continued high deficits, and higher if anything
2. A flat 10% tariff
3. Extension of 2017 tax cuts
4. Little else

Keep a very close eye on Congress as the Senate is already talking about splitting reconciliation and working on the border first and saving tax cuts for later.