Tariffs: Strange Week, Tactics Not the Point

We revisit a few tariff topics from the week with the fixation on Canada a major part of the problem.

Mar 15, 2025

Maturity, level heads, and factual analysis reign in the tariff food fight…

Trump’s outsized “retaliation to the retaliation” tariff threats create a more toxic political backdrop for the two sides and raise domestic political stakes for the trade partners. As we see in Washington, most politicians put reelection priorities over anything else.
The challenge in equity and credit risk pricing is that the market is in the 1^st inning of the tariff pain with waves of decisions, actions and transactions to come across the process of hammering out the alchemy of reciprocal tariffs, making the cases for Section 232, and sorting out the ongoing product-specific tariff threats in pharma, semis, copper, lumber, and autos.
Since “the buyer pays” (in contrast to the Trump assertion), the lag time will be slow but steady as tariff costs flow into the transaction chain, across the pricing impact in supplier chains and inventory, and enter the wonderful world of double-entry accounting.
The final points on the private sector decision making will slowly roll into the economic releases as industries adjust supplier chain plans, frame product pricing, consider cost offsets to protect margins (plant closings, layoffs, etc.), and of course meet the demand realities of the end market decisions from low price consumer goods to big ticket durables. It is not a frictionless wheel.

Economic indicators, shutdown risk, tariff dis/misinformation…

There was no shortage of material economic issues to sort through this week from tariffs to government shutdowns to the ongoing debate on how aggressive Trump will get in his “retaliation to the retaliation” strategy. That “just tactics” question was answered this week as trade war risk rose sharply.

The handicapping of tariffs can use the strange case of Canada as an indicator of an irrational approach to tariffs. The extrapolation would be reasonable and notably after the 200% wine and spirts threat to the EU. The EU trade issues will heat up later, but we see Trump as having made Canada enemy #1 (see Happy War on Allies Day 3-4-25). The Canada battle is a microcosm of what is to come with the “reciprocal tariff” game plan in April when it will get uglier with even more trade partners.

The refrain of “Canada needs the US more than the US needs Canada” is a fair statement even if just on the basis of the US being the largest economy and the largest purchaser of goods. Similarly, Bessent stated clearly that the trade partner with the surpluses always loses. That said, much of the imports are purchases by companies (not some amorphous “US” ethereal concept) that have spent decades building out global supplier chains (from auto to department stores).

Those pitching that grotesquely simplistic, one-dimensional view of “we are the baddest MF in the valley” should look up Pyrrhus as one of the legendary dumb asses who suffered from “more-is-never-enough syndrome.” It does not end well. Pyrrhus was not supposed to be a role model for trade and tariff strategy.

Presiding as the victor in a trade war might give you the winner tag but it might also include being President over a country seeing a material spike in inflation, soaring layoffs, massive industry dislocations across the North American economy (or a growth wasteland at that point), and crushing asset quality and thus undermining the bank system.

The risk of turning the rural sector into a Grapes of Wrath replay with potash supplies impaired, costs materially higher, and fertilizer supplies running out is a sub-optimal scenario. That might not be the best “go-to game plan” of a remotely rational US leader. One worry is the “yes men” collection might wait until it happens to speak up.

“Retaliation to the retaliation” and the economic March of Folly...

The problem with game theory is that both or either side can just torch the chess pieces (or checkers in some cases) and knock the table over. That hurts both sides, but then someone will face the election music. For Trump, the damage from tariffs in the real economy will be experienced as the midterm election year of 2026 approaches. Contraction, inflation (or stagflation) and a documented failure of his tariff plan would be a bad position to be in.

The quadrupling of tariffs as a retaliation threat in the case of European wine and spirits was one example of irrational excess. Another was threatening to double the steel and aluminum tariffs on Canada. The multiplier effects will just keep upping the ante on more retaliation and into more sectors from raw material costs (steel and aluminum) to manufacturing (autos).

Even just in the case of the wine and spirits threat, the policy will damage niche retail (crushing liquor retailers/package stores, hurting restaurants and caterers, haircutting revenues for freight and logistics players). DOGE gave a taste of how angry Trump voters can get, and the ready willingness to spread revenue, expense and employment pain is never cited.

Trump just does not care. It is not his money. And it certainly won’t be his personal pain. There are always multiplier effects that will get multiplied over and over, and it is not clear that he can remotely articulate the concept.

Trump keeps his tactic of falsehood-to-fact conversion therapy going by just repeating the same phrase over and over. In this case, “ripping us off” has a long way to go to reach “rigged election” and “best economy in history.” He also keeps repeating the US is “subsidizing” major trade partners. but that is devoid of fact, concept or transaction specifics. Private sector decisions on supply are more accurate.

The transaction and conceptual connection on trade deficits to a subsidy is a special kind of bizarre. Pick a product. Every time someone buys a pair of CCM skates, it is a case of the “US subsidizing Canada.” That low-cost aluminum which continues to replace steel in the vehicle mix to improve weight and fuel efficiency? Subsidy. The specialized oil country tubular goods for drilling?” US subsidy. That discounted heavy crude oil that US refiners love to buy for numerous reasons? US subsidy. The potash that allows farmers to productively grow their crops? US subsidy. Try sourcing potash in the US! All you need is a magical mine.

It is hard to describe what Trump’s statements reflect on such topics (economic ignorance? serial lying? 4^th grade vocabulary?” etc.). His deaf-mute appointees have little to say on the subsidy matter. We have covered the easy economic topics he misses in other commentaries (see The Trade Picture: Facts to Respect, Topics to Ponder 2-6-25, Tariffs: Questions to Ponder, Part 1 2-2-25).

Canada and dairy as a microcosm of the problem…

Besides his focus on steel, aluminum and autos, Trump seems fixated on dairy (political stakes in Wisconsin) and keeps talking about 250% tariffs by Canada on US dairy. That has been picked apart if one is willing to look (you won’t hear it on Fox News).

The reality of the dairy trade issues look more like this:

The US has a massive trade surplus in dairy with Canada around 3:1 US exports to Canadian imports.
The dairy trade with Canada is tariff free and subject to a quota the US has not hit. Only after that quota is reached does the tariff spike kick in. That is why they call it “quota.” These are part of what is called Tariff Rate Quotas (TRQs), and the dairy deal had TRQs. That was the deal in the USMCA that Trump agreed to. He seems to forget how it works.
Renegotiating (or trying) the dairy terms of the USMCA is fine if that is a priority, but don’t lie to such extremes. The “liar liar pants on fire” counter to Trump is not something he loses sleep over, but the equity markets will see the misstatements as signs of irrational negotiating that will lead to more of the same in other product lines.
The Trump 2.0 team should recognize the domestic political power of the dairy sector in Canada. It cuts both ways. Ontario and Quebec are the big areas in dairy. Bad faith negotiation is fair game in NYC 1980s real estate, but this is NAFTA to USMCA to whatever it is called or cancelled in 2025. Shutting down the trade of all dairy between the two countries cannot be ruled out. That would hurt the US more.
Trump issuing a ½ truth on dairy may seem like a major victory for truth, but the part that he left out (the quota issue) negates the other ½ since it undermines his whole point. That won’t stop him from repeating it, and it will be a strategy he continues to employ with other products. This is why God made ChatGPT (it gets you to the trade rule facts, Congress should try it.)
Trump declared his USMCA deal on dairy in 2018 (effective 2020) a major victory for his dealmaking prowess and Trump did the Mick Jagger turkey strut after he won dairy concessions. So, this latest rant is especially strange.
The US and Canadian dairy producers both do nothing but complain about unfair trade and want more, more, and more support.
Google the phrase “US milk cartels and price fixing” for a sense of the sordid history of dairy industry machinations in the US and the bankruptcy-prone producers who love to dump oversupply in other markets.

Aluminum ambitions by Trump should be canned…

We can do this drill on aluminum and other targets, but in the end, every product group has its own dynamics on what the US can supply and what Canada can supply. The “comparative advantage” issues you learn about in intro econ still apply. We assume Trump slept through that class in his first couple of years at Fordham (before transferring to UPenn).

Low cost hydroelectric in Canada is an overwhelming advantage in aluminum. There is a reason why the major US and global companies operating in aluminum had been major factors in Canada (including Alcoa) and not the US. The big players in Canada include Rio Tinto (the consolidator) and Alcoa. Aluminum is a global business by definition. Bauxite and alumina also are a different part of the global puzzle. If we look across the bauxite to alumina to primary aluminum chain, the US is a non-factor in global context.

That said, the US is a giant aluminum customer. Then comes the trade deficit in aluminum. Selling the US the aluminum the US wants and needs in Trump’s mind is a “rip-off.” Since the US is a big importer of aluminum, lower tariffs make sense – not higher. Is Canada subsidizing the US with aluminum? Are the bauxite and alumina producers subsidizing the US. At a certain point, being sarcastic does not adequately capture just how unhinged Trump’s economic “concept puree” really is.

Trump has damaged the trade talks by saying the US “needs nothing from Canada.” Maybe Trump can get his dream team to look up potash and fertilizer costs as a critical ag sector need for an easy example of the absurdity of that statement. The Fertilizer Institute in Virginia disagrees since 85% of potash in the US comes from Canada. Bringing up Canada as the 51^st state daily undermines the process also and “goes to motive.” As a side note, someone should ask Bessent or Lutnick about what high tariffs on something like potash and fertilizer might mean for farmers. Is there a solution they have in mind?

The battle is just starting, and the main event will remain tariffs while deportation and wage inflation risk has taken a back seat in the inflation dialogue.

Tariff links:

Trade: Betty Ford Tariff Wing Open for Business 3-13-25

CPI Feb 2025: Relief Pitcher 3-12-25

Auto Suppliers: Trade Groups have a View, Does Washington Even Ask? 3-11-25

Tariffs: Enemies List 3-6-25

Happy War on Allies Day 3-4-25

Auto Tariffs: Japan, South Korea, and Germany Exposure 2-25-25

Mini Market Lookback: Tariffs + Geopolitics + Human Nature = Risk 2-22-25

Reciprocal Tariffs: Weird Science 2-14-25

US-EU Trade: The Final Import/Export Mix 2024 2-11-25

Aluminum and Steel Tariffs: The Target is Canada 2-10-25

US-Mexico Trade: Import/Export Mix for 2024 2-10-25