In this post I want to go beyond simply the usual vague discussions of Trump’s tariff strategy. In earlier posts which I recommend you read I considered the general theoretical strategic issues at a higher level that sought to explain the major changes involved ignored by many market participants still incorrectly starting with the international organization model . Now I want to just begin to get down to specifics and what it potentially means for markets. The goal of Macropoliticalmarkets is not to give you quick trendy and “fun” posts intended to boost subscribers but instead higher level analysis perhaps limited to only to a few readers who can understand that higher level. Such readers might not fall into the usual categories of elite and non-elite. Who knows they might be like the great investor Bruce Kovner driving a taxi in NYC or I guess these days an Uber. In fact I would argue that many of the conventional elite may unfortunately be the last to figure out the significance of some of these key macro changes. More’s the pity.
So to get to it let’s consider what should be obvious which is that Trump seeks to fundamentally change the map not just for what used to be the Gulf of Mexico but also for tariffs and trade around the world. I remain as always on this site politically neutral, this is an educational nota. political site so I won’t comment on whether this is a good idea or not. It certainly is a high risk, high reward strategy which makes sense given that its Trump and no one ever became a billionaire with a low risk, low reward bureaucratic strategy. Now Trump looks around the world and he interprets all the trade barriers to US businesses and US trade defecits with other countries as a trader would like a zero sum game in which the US is losing to these other countries. Now the earlier model of the international organization model was that this was the price the US paid to get other countries to accept an overall system we in many ways controlled.
Perhaps, but from Trump’s perspective even if this was ever the case it no longer is. The US is not getting enough control if you will for the price its paying and from the alternative real-politique approach he embraces this was always a bad overall strategy. As new secretary of state Rubio suggested in his recent confirmation hearing, to paraphrase, that global system is now in his view being used as a weapon against the US.
But the deeper question what exactly does that means for markets? It means that if you are a country with a high trade surplus versus the US or high trade barriers Trump is coming for you and aims to change hat fact by deploying American power primarily but not exclusively at all through tariffs. Now trade barriers without a trade surplus is a much less serious problem in this view so there are contries like, for example, Brazil that have high trade barriers but on the trade deficit side not a problem. In 2024 the US exported 45.4 billion dollars worth of goods to Brazil and Brazil only imported 38.5 billion in goods so despite hight trade barriers that’s a trade win for the US of a trade surplus of 6.9 billion dollars. Now Trump might still go after Brazil because they don’t like Lula’s politics or the fact he was advocating going off the dollar or the US wants more influence over South America, but from the “common sense” perspective Trump says he’s championing it makes no sense really to pick a fight with Brazil.
What then would be the top 15 countries in the world the US is most likely to target with its tariff strategy and would have perhaps the hardest time with reciprocal trade barriers. Since Trump cares most about trade deficits lets compile that list giving trade deficits a 70% weighting and trade barriers a 30%. Such a list and it is always of course subject to errors in the exact numbers but simply as a first take on the question consists of the following:
Number 1 by far is China with a trade surplus of 323.3 billion dollars and a tariff rate of 7.5% with a weighted average of 230.3. The closest country and its a clear ally not global competitor is Mexico with a trade surplus of. 126.11 billion and tariff rate of 6.8% and a weighted average of 88.67 which is merely around a 1/3 of that of China. And next up comes Germany with. a trade surplus of 65.77 and a tariff rate of 5% and a weighted average of 45.44.
Fourth is Japan at 60.22, 3.7, and 42.16.
Fifth, is Canada at 55.45, 3.8, and 39.82.
Sixth, is South Korea 25.89, an incredible and super high 13.4% tariff rate, and 18.63 weighted average.
Seventh, is Vietnam with 23.45, 9.4, 17.11.
Eigth, Taiwan 20.78, 6.5, 15.54.
Ninth, United Kingdom 19.32, 3.8, 14.34.
Tenth, India 17.89, 17, 13.11.
Eleventh, France 15.67, 5, 11.84.
Twelth, Italy 14.21, 5, 10.94.
Thirteenth, Switzerland 13.45, 5, 10.29.
Fourteenth, Netherlands 12.89, 5, 9.76.
And Fifteenth, Hong Kong 11.34, 5, 8.60.
Examing this list a few things become obvious. First many of these countries such as Germany, France, Japan, South Korea, the UK, Canada , and Mexico are major allies of the US and in several cases coutries we have very strong military alliances with. Now from the international organization perspective we give these countries a major economic break, if you will, because of this fact. But from the real politique perspective Trump is championing they have taken advantage of the global system and our alliances with them to weaken the US economy. If you want to create an economic boom and restore US hegemony then this global order must change. The military support is leverage actually to get them to make these changes. In this view they will need to take on far more of the cost of their own defense, and the trade deficits and trade barriers must end. In Trump’s approach these countries are sort of like friendly competitors in the same business sector. They may all get together in international organization style at the annual industry convention, they may share certain common industry goals, but beyond that they are competitors and if the US doesn’t understand that the US loses. So these countries should expect tremendous push back from Trump to accept a vastly changed global system.
Second, key point. Either the countries on the list change their trade barriers and trade surplus or the US puts a weight on their competition and collects heavy tariffs. This includes from allies who are still competitors at the end of the day from this perspective. In this regard those 30 and 40 something market participants who have never known anything but the international organization approach are missing the point when they say this is a mere bargaining ploy. No it’s not. From a real-politique perspective it is intended to fundamentally change the map so the US wins much more and to use the metaphor is the undisputed market leader or even in many ways monopolist power.
Third, many of these countries especially from the EU have been the biggest supporters of the global sytem from which they have benefiited and to use Rubio’s phrase used this global system against the US with free trade for me but not really for thee with the US. In this new perspective the new regime seekds to completely redefine the broader global system.
Fourth, many of the other top countries on the list are outsourcing centers for American corporations such as China, Vietnam, Mexico. They were where American businesses, and I have written about this extensively elsewhere, shipped American jobs to for in some cases cheaper labor or in other cases such as Japan and South Korea they are key rivals who have taken business from US manufacturing. If Trump is serious about resourcing the goal is not as some market participants wrongly believe simply a new deal—it is, on the contrary, to fundamentally reverse those changes and bring manufacturing back home. By imposing major tariffs on these countries longer term the incentives change to buying American and now bringing manufacturing and jobs back to the US. In this view cars made in part in Mexico and Canada need to be made in the US, electronics made in Asia need to be made in the US, etc. Will this necessarily be applied across the board? Perhaps not, but these are the incentives. Also if you’re a country like South Korea where you are a major supplier of cars and electronics in the US but have very high trade barriers and for which the US spends a lot on military defense you better change, if you can, your manufacturing to the US and drop those trade barriers or your likely to have very high tariffs indeed.
Fifth, China is by far the Giant Panda in the room. In a way much the new regimes entire policy can be viewed as ultimately directed at changing the power and economic position of the US vis a vis China. The EU is also an obvious target of this strategy and these two categories are in many ways the US’s biggest economic competitors by far. One expects that pressure on the EU will also be used to encourage a decoupling with China.
Sixth, and I will have more to say on this in a later post, the key industries which come up over and over again when one looks at the countries on this list with trade surpluses are at the very top of the list representing a key trade surplus for no fewer than 9 of the top 15 countries, machinery. Expect a big push therefore for Trump to build up US machinery production. Next up comes electronics and pharmaceuticals at 6 of the 15 countries each. Expect Trump to champion increasing pharmaceutical production in the US and electronics production. Then comes textiles at 5 of the top 15. Will Trump try to rebuild what was once a thriving US textile industry. At 4 is automotive and at 3 agriculture. Given Trumps promises to the auto workers and farmers he is likely to heavily pursue these areas also. This will no doubt be linked with also building out key areas like AI where the use has in many ways an obvious comparative advantage.
Companies in these sectors in countries with trade surpluses can try to preempt these potential negative effects by changing some of their production in many cases to the US and you are already seeing major companies adopting such a counterstrategy. This will especially be the case if Trump is able to get through Congress major additional tax cuts and significantly reduce regulations on businesses. Hence, there are key additional aspects to the tariff discussion which I will have more to say about in later posts..
What will all this mean for markets? It’s too soon to tell, obviously, for such a high risk strategy. However, one can say that the current market favor for what are seen as comparatively cheaper European stocks may be overdone to say the least and there is a great deal of risk there. Chinese stocks may obviously also be subject to a great deal of volatility. Perhaps China can maneuver its way through the impending Trump tariff plans. The regime does have.very deep pockets, talented leadership and as the recent Deep Seek release has suggested may even have some potential competitive advantages. Certainly the earlier Trump tariffs did not have much of an effect, but this time may be different. Supposedly the Chinese leadership commissioned at one point, so the story goes which may or may not be the case, a comprehensive study of what caused the fall of the Soviet regime so as to avoid the same mistakes. There are those who have argued the US getting the oil price to come down as it did greatly contributed to the financial crisis that ultimately undermined the Soviet Empire. The US may see tariffs as a similar weapon to be used against China, but one would expect the Chinese leadership to be very aware of this fact and taking measures to counter such effects. Also anyone investing in the key industry areas mentioned above that may be targeted in tariffs such as ,manufacturing will need to add this risk to their decisions.
There is a Chinese phrase that is actually considered a negative which is “may you live in interesting times.” These are certainly interesting times. Usually the geopolitical, or as I prefer to call it macro-political, has important implications for markets but the effects are much less pronounced than now. At present the macro-political has become without question fundamentally important. Time will tell what countries ultimately win and lose in the resulting competition for power.
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