INN@UT #6: Reciprocal tariffs, Trade War 2.0, and the Mar a Lago Accord

1. Briefly describe President Trump’s April 2^nd announcement of so-called reciprocal tariffs. How were these tariffs calculated?

• President Trump’s April 2^nd announcement of so-called reciprocal tariffs

  • Not reciprocal tariffs, baseline tariff of 10% with additional tariffs on 60 countries 

  • • Tariff designed to offset others’ tariff and nontariff barriers (content requirements, exchange rate manipulation, subsidies, value-added taxes)

• these tariffs were calculated

  • set by ratio of bilateral trade deficit over imports (divided by 2) – 

    • trade deficit: the amount by which the cost of a country's imports exceeds the value of its exports.

      • frequently a function of foreigners to lend us money

      • it is because of the desirability of investment in the US that we run huge trade deficits

        • We could run a huge trade deficit because others want to invest in the US not because other governments are trying to throw tariff barriers on us 

    • Targeting bilateral trade deficits rather than trade barriers 

    • – Bilateral trade not just driven by trade barriers, also function of comparative advantage within global network of exchange 

  • • Important: higher effective tariff rates than Smoot-Hawley that caused the great depression

2. Describe the mixed messaging from President Trump and various administration officials regarding the goals of these tariffs. Why does it matter whether the reciprocal tariff rates were described as the start of negotiations (and thus potentially flexible) or the final tariff that would not change?

•  the mixed messaging from President Trump and various administration officials regarding the goals of these tariffs

  • two primary goals 

    • bring back manufacturing industries and firms into the US to help workers 

    • spur a renegotiation of terms of trade 

  • There is also uncertainty associated with the longevity of the tariffs

    • trump says they are the start of negotiations while his advisors have said that they are here to stay and are designedT o encourage Global Capital holders to make new very long manufacturing Investments inside the US

      • but you cant do both at the same time. You can't have tarrifs that are not going to be around forever to be used as the starting point for negotiations and at the same time have those same tariffs which wont be around forever bring brack a bunch of new industries/jobs to the US because those are long term investments that asset holders wont go for if these tariffs are not staying forever

• whether the reciprocal tariff rates were described as the start of negotiations (and thus potentially flexible) or at the end of negotiations (final tariffs and wouldn’t change) is important

  • Mixed messages from admin. officials and Trump 

    • trump says they are the start of negotiations while his advisors have said that they are here to stay and are designedT o encourage Global Capital holders to make new very long manufacturing Investments inside the US 

  • Significance:  businesses hesitate to make major investments if not sure tariff protection will remain in place 

  • So…uncertainty contradicts core goal of policy to encourage more industrial investment inside the US

3. How did the following actors respond to the US announcement of reciprocal tariffs:  China, the European Union, critics in Congress (including some Republicans), the stock market?

• response from china

  • China responds with retaliatory tariffs

• response from the EU

  • EU sharply criticizes and prepares retaliatory tariffs

• response from critics in congress

  • Congressional opposition (even from Republicans) 

    • Move toward legislation equivalent to War Powers Act for tariff policy (backed by a republican house member)

      • In the aftermath of the Vietnam War Congress retaking some of its power over using Force abroad And this proposal does the same thing.

        •  it is meant to enable Congress to seize Some of its constitutional authority over tariffs by requiring the president to notify Congress Within 48 Hours of issuing a new tariff and then it would require the president to secure Congressional approval for any new traiff within 60 days and it expires otherwise

• response from the stock market

  • Rapid deterioration in equity (stock prices)

4. Describe President Trump’s subsequent announcement on April 9^th. What did Trump change regarding trade policy in this announcement?

• President Trump’s subsequent announcement on April 9

  • 90-day pause on all reciprocal rates greater than baseline of 10%...except for China 

  • Escalation of trade war with China…tariff rate on Chinese products now at 145%...

    • essentially an embargo that will halt trade between the countries 

  • Huge stock market rally on April 9 (S&P500 +9.6%)

• Trump changed ___ regarding trade policy in this announcement

  • he paused them?

5. How did the US Treasury Bond market influence President Trump’s position on reciprocal tariffs? Be sure to understand how the bond market normally reacts to significant economic downturns and also how trends were different in the bond market on April 7.

•  the US Treasury Bond market influence President Trump’s position on reciprocal tariffs

  • Journalists have said that these Financial Market Shocks particularly the rapid and unexpected collapse in bond markets/bond prices that pushed long term yields or interest rates that triggered the reversal on April 9th 

•  the bond market normally reacts to significant economic downturns

  • Normally…a significant downturn triggers flight to safety…investors sell stocks and buy US treasuries because viewed as least risky investment 

    • Bond prices go up and yields (interest rates) go down which means it is cheaper for the government to borrow and cheaper to buy cars and houses 

• trends were different in the bond market on April 7

  • This occurred on 4/3 and 4/4, but trends reversed on 4/7…bond prices fell and yields on 10-year Treasuries jump up 

    • Significant because indicator of long-term borrowing costs in US, like for home mortgages

• 

6. Describe the escalation in the trade war between the United States and China. What level of tariffs did the US put on China on April 9 and what level of tariffs did China retaliate with against the US? What effect might this level of tariffs between the US and China have of trade between these countries?

• the escalation in the trade war between the United States and China

  

• level of tariffs did the US put on China on April 9

  • Apr 9:  US tariffs to 145%

•  level of tariffs did China retaliate with against the US

  • Apr 11:  China tariffs to 125%

•  this level of tariffs between the US and China might effect trade between these countries by

  • essentially an embargo that will halt trade between the countries ?

7. How might the escalation of the trade war with China be an offramp to the reciprocal tariff crisis?

•  the escalation of the trade war with China be an offramp to the reciprocal tariff crisis

  • Administration couples de-escalation with all trading partners with escalation of trade war with China 

  • Makes concessions/reversal more tolerable politically 

    • Makes china seem like the real enemy because theta re the only one that relatilated

  • So…fulfilling broader goal of re-industrializing the U.S 

    • because we have basically stopped war with china

  • Tariffs will effectively halt trade between two economies (embargo)

8. How might the trade war between the United States and China be viewed as an economic war of attrition?

• the trade war between the United States and China might be viewed as an economic war of attrition

  • Which country can sustain the costs of the trade war for longer? (who can tolerate more pain is the war of attrition) 

  • Leaders of both countries express unwillingness to concede, recognize sharp costs to each 

  • Logic of war of attrition 

    • Paying daily costs (in terms of lost trade, higher import prices/inflation, falling equity prices, higher unemployment, lower economic activity)

    •  If know that the other side can sustain these costs for more days, you are better off conceding right away to avoid paying these costs 

    • So…uncertainty over each side’s pain tolerance helps explain the continuation of the trade war 

  • Trump negotiating challenge:  he just sent a powerful signal about the limits of his pain threshold…growing risks of a collapsing bond market (implication:  watch Treasury yields)

    • China selling off it's US Treasury bonds would hurt China too. If they are selling the treasury bonds that's going to push up the Value of Chinese currency relative to the dollar which will then make their exports less competitive which makes it harder for Them to export their way out.  

    • ppl are less concserened about the dollars position as the reserve currency because their is no where else to go

9. What is the so-called Mar-a-Lago Accord? Explain how the plan encompasses the grand strategy underpinning the Trump administration’s tariff policies. What are the structural problems that the Mar-a-Lago Accord tries to address? What are the policy responses that the plan proposes to employ?

•  the so-called Mar-a-Lago Accord

  • Grand Strategy explanation for the tariffs 

  • Reciprocal tariffs not just about trade…Trump Admin wants to reset global economic order AND global security order 

  • Opening salvo in complicated mix of trade, industrial, currency, and alliance policies 

  • Stephen Miran, Head of Council of Economic Advisors, wrote an important policy brief in November 2024

• the plan encompasses the grand strategy underpinning the Trump administration’s tariff policies by

  • reset global economic order AND global security order

•  the structural problems that the Mar-a-Lago Accord tries to address

  

• the policy responses that the plan proposes to employ

  • 

  •