Donald Trump’s gunboat commerce offers present a tariff marketing campaign reaching its limits

Hello and welcome to Trade Secrets. We’ve had a fresh batch of these not-actually-trade-agreements-as-such that US President Donald Trump strikes with other countries. Today I posit that, rather than representing the triumph of his tariff campaign, they suggest it might be running out of energy. This recalls the intriguing question we asked in January: will Trump’s second term just be Richard Nixon all over again? Charted Waters, where we look at the data behind world trade, is on the UK and its sickly pound sterling.

Your predictions in response to my question last week about the US Supreme Court ruling on Trump’s tariffs were closely bunched around the justices upholding the lower court decision to strike them down by 6-3 or 5-4 margins. Hats off to the correspondent who constructed a plausible argument using probabilities and game theory for a 9-0 defeat for Trump. I’ll continue to accept entries until the decision is handed down — so do email in any more guesses.

A weakened Trump on the defensive on tariffs

I still don’t really know what we call these things. They certainly aren’t grown-up trade agreements, given that they’re massively World Trade Organization-non-compliant, capricious and not properly constituted under international law. Armistices? Ransom? Protection money? Demanding market access with menaces?

A couple of weeks ago I trialled the term “gunboat deal” after the 19th-century term for threat-based diplomacy. That certainly fitted recent US agreements with Cambodia and Malaysia, in which Trump’s tariff campaign apparently succeeded by agreeing higher levies on imports to the US than on exports from it. He also got those countries to acquiesce to a bunch of coercive-sounding measures, such as following the US’s lead in imposing export controls.

Last week another such deal was announced with Switzerland, which reduced tariffs in return for the usual vague talk about investment in the US. But the rest of the latest batch with Latin American countries have a different focus. Trump last week announced deals with El Salvador, Guatemala, Ecuador, and his pal President Javier Milei in Argentina, and explicitly said the pacts were partly about bringing down costs for consumers, specifically for imported coffee, cocoa and bananas.

It’s an incredible U-turn from his earlier positions, which suggested foreign exporters paid tariffs and a higher price level at home didn’t matter. It turns out they don’t, and it does. As I said last week, he’s managed to twig that there’s a cost-of-living issue, but he doesn’t know what to do about it. 

The late sex offender Jeffrey Epstein wasn’t noted for his views on trade policy, though he did have fantastically ignorant opinions on inflation, which he told former Trump adviser Steve Bannon in an email was “a concept from the 50s”. But the revelations of Epstein’s links with Trump bear on trade policy in the sense that anything that weakens the president in general makes him more vulnerable on issues where he is polling badly. Populists are, after all, supposed to be personally popular.

Marjorie Taylor Greene, the Georgia congresswoman who has emerged as a vicious critic of Trump from the right, has been critiquing his tariffs for several weeks. Seizing on Trump’s vulnerability over Epstein, she has now escalated those relatively modest complaints into a much harsher personal assault on the president over the cost of living.

I said before that financial markets and Chinese trade retaliation were the most effective restraints on Trump’s tariff madness. Public opinion over the cost of living is emerging as another. Trump thought tariffs would be a key part of his populist appeal. He’s realising they’re actually a harmful self-indulgence.

The accidental reincarnation of Tricky Dick

Trump’s vulnerability over tariffs also means that these gunboat deals are likely to prove much less coercive than they look. Live by informal agreements that rely on leverage and power relations, die by them too. Trading partners wanting to escape Trump’s bullying can try calling his bluff, hoping that the gunboats can’t fire their tariff ammo for fear of blowing themselves up. The US is complaining about the EU’s slow implementation of the sort-of-deal they agreed earlier in the year: this will be a good test of whether it dares use heavy ordnance to enforce it.

At this point we’ll go back and recall what the great Doug Irwin of Dartmouth College posited in an Economics Show podcast I did with him in the very week Trump was inaugurated — that trade policy in Trump’s second term would end up most like Nixon’s. (Whether it similarly involves the president resigning in shame remains to be seen, although unlike 1974 it almost certainly won’t be because congressional Republicans develop a spine and stand up to him.)

Railing against foreigners cheating the US and the country’s trade deficit, Nixon instituted a 10 per cent across-the-board “surcharge” on imports. But he resisted going for all-out isolationism, punched holes in the tariff wall where American companies needed particular inputs, and helped launch the “Tokyo round” of tariff liberalisation talks.

Now, the chances of Trump suddenly falling in love with multilateralism are vanishingly small, and the profile of US tariffs shows he has already gone quite a lot further than Nixon ever did. But, if you look at the change as well as the level, the average effective tariff rate has been edging down since the big swath of duties was imposed in August. And with each deal he tends to erode the rate further.

You can actually imagine an (admittedly unstable) equilibrium in which average tariffs level out not far above 10 per cent, and Trump feels constrained by the threat of trading partner retaliation, financial markets and public anger about high prices from going further. In that case, he’ll end up the reincarnation of Tricky Dick. Not by choice, but necessity.

Charted waters

Both currency and bond markets, it seems, like tax increases. Or, at least, they don’t like inept fiscal policy, which the UK has seen a lot of in recent years. UK government debt yields have leapt sharply higher and sterling dropped to a two-year low against the euro after the howling mess of expectations management Prime Minister Sir Keir Starmer’s Labour government has made ahead of its annual Budget later this month.

Trade links

• The EU’s carbon border adjustment mechanism is under pressure in the COP30 trade talks, with big emerging-market exporters, including China and India, regarding it as protectionist.

• The Wall Street Journal reports on how China plans to stop the US military getting its hands on Chinese rare earth exports.

• This came out a week back, but it’s still incredibly striking that China has managed to flatten out its carbon emissions by dint of spending vast amounts of state money on research and development rather than tough emission controls regulation or carbon pricing.

• Paul Donovan, chief economist at UBS Wealth Management, has thoughts on the risks to Trump of allowing price rises to be tied to tariffs.

• China’s exports of tomato paste to Italy have dropped sharply after an outcry about alleged forced labour in Xinjiang and accusations of inaccurate origin labelling. Good news for tinned tomato magnate Francesco Mutti of the eponymous Italian food company, who last year called for tariffs on imports from China to “give [Italian] tomatoes their dignity”.

Trade Secrets is edited by Harvey Nriapia