😬 The Trump trade war begins

Hey hey, happy Monday.

Today, everything you need to know about the proposed tariffs, timestamped at 3:45 pm Sunday afternoon (because we all know things can change quickly these days). Ugh.

This is a long Q&A, so consider reading it section by section. Or, if you have 10 minutes to spare, enjoy it over a cup of coffee.

When you’re done, you’ll be able to explain this tariff situation to all of your friends and family – even that cranky, conspiracy-obsessed uncle of yours – or I’ll give you your money back.

Finally, smash the button below to share OptimistiCallie with a friend 😊

One part of my job that’s, errrr, unpredictable, is late-breaking market news.

It’s always been this way, from when I was a cub reporter at Bloomberg to my role at Ritholtz. People have questions, and I am obligated to have the answers. It’s a blessing and a curse. You get the adrenaline rush, you give up weekend brunch.

So here I am on a Sunday morning, sipping my coffee and eating my yogurt with Mexican-imported blueberries, executing a brain dump on these historic tariffs announced last week that will almost certainly make my – and your – breakfasts more expensive in the coming weeks.

There’s a lot to digest here. What am I going to be spending all my money on now? How long will these tariffs really last? Will I have to change my investing strategy? Will I have to change my breakfast routine? Will any of this matter if Trump changes his mind, as he often does?

Let’s go.

Hold on, what exactly are tariffs?

Don’t be embarrassed if you have no idea what’s going on. This stuff is difficult!

Tariffs are simply a tax on imports. They’re levied on the importer when the goods reach our ports, and often, they’re passed along to the end consumer.

Tariffs have been around for most of America’s history, and they once were the dominant source of government revenue. Tariffs were more popular about a hundred years ago when the world was more fragmented and domestic manufacturing was easier to protect. 

So what’s the big deal?

This isn’t exactly new, even though it’s a particularly outdated idea. The U.S. has already imposed tariffs on products from China like steel and aluminum.

But Trump’s latest proposal threatens a 25% tax on a broad swath of products on our two biggest trade partners, Canada and Mexico, plus a 10% tariff on China. This also includes a 10% tax on Canadian oil imports, which make up for about 60% of the U.S.’ total oil imports.

If Trump keeps his word and these tariffs go into effect at 12:01 am ET on Tuesday, the average tariff rate will soar to about 18%. And those extra fees will likely be passed onto you.

ING economists estimate that these tariffs could add as much as $3,200 a year in extra costs for a family of four. Think of that when the median household income is about $80.000 a year. Yikes.

Where am I paying all these extra tariff taxes?

At the grocery store, mainly. Especially if you like salads and Modelo.

Last year, Canada and Mexico supplied about 90% of our imported fresh vegetables. Yes, you read that right. You could feel the biggest impact in the produce aisle, especially if you consider that the vast majority of U.S. farms aren’t in season. There are some great tomato farms near me, but they aren’t growing anything in 30 degree weather.

Unsurprisingly, Mexico also has a lock on our beer and avocado supply, which is extra unfortunate considering the big game is next weekend. A staggering 91% of our avocados come  from Mexico, and Modelo is the most popular beer brand in America. Canada supplies 66% of our imported poultry and 51% of our imported pork. Mexico supplies 46% of our liquor, which means even that shot of tequila you take to drown your tariff-related sorrows will cost you dearly.

Outside of the grocery store, you could feel the tariff pain at your local car dealership. Canada and Mexico provide about 47% of our imported cars and vehicle parts. Yes, even if you buy from an American auto brand, your car may be manufactured elsewhere. Oh, and you’ll get hit at the gas pump, too. 60% of our imported oil comes from Canada and Mexico.

Also, godspeed if you’re looking to buy – or spruce up – a house. 60% of our wood imports and half of our imported furniture, bedding and lighting fixtures come from Canada, China and Mexico.

I know this is overwhelming, but I want to get this point across: these tariffs are broad and swift. We will all pay for them.

Here’s a list, courtesy of the Census Bureau, the Department of Agriculture and yo gurl’s Excel gymnastics:

It’s not just higher prices, either. Some of your favorite items may be harder to find.

COVID taught us that supply chains are globally dependent, and when tested, can be shockingly fragile. A lot has changed since then – firms have built dependencies in manufacturing so a COVID-like break won’t happen again. This doesn’t mean supply chains are foolproof, though. Policy that impedes the travel of goods across borders and hobbles intermediaries can lead to slower delivery times and scarce items. 

Especially if, like avocados, you can’t just snap your fingers and drum up a domestic supply of the goods in question.

Ugh, this isn’t fair! What can I do to save some cash?

The government would tell you to buy from American brands. Pass on that Modelo and grab yourself a Bud Light, buddy.

And while that makes sense, it’s more complicated in real life. The benefit of global trade is lower costs, so Americans are already used to exceptionally low prices. A made-in-America item may be higher quality, but it’s probably not going to be a bargain.

The other angle you could hope for is some grace from corporate America. Passing on costs is a choice for businesses. Companies won’t just jack prices up if they don’t think people will pay them.

In my mind, this possibility is a toss up.  Higher prices may or may not be as mechanical as they sound. Companies have hiked prices in recent years, so who says they won’t seize this opportunity? Well, the owners say so. They’ve complained to Fed officials for months about how it’s harder to get away with higher prices. Plus, S&P 500 companies are sitting on record profit margins, which means they can absorb some cost.

Are tariffs going to crash the economy?

Nobody knows. But oh man, there are risks here.

First, the biggest risk: the world is intricately connected. You can’t smite global trade without feeling some blowback, and we rely on the good graces of other economies more than you think. The US is a net importer, meaning we bring in more goods and services than we send out. But we did still export more than $1 trillion in goods last year. Our economy does grow on demand, including demand outside our borders.

Our tariffs could reduce imports, and retaliatory tariffs could weigh on our exports. It’s a tough time to upset the trade balance, considering export volumes are already slipping because the world is falling behind economically. What hurts some countries could benefit others, though. Our top trade partners outside of Canada/Mexico/China are Germany, Japan and South Korea (according to 2023 trade data). Canada and Mexico may be the top two exporters or vegetables to the US, but who says we can’t just source more from Peru?

Tariffs can also have far-reaching impacts across the most important part of the economic foundation: the job market.

Just six months ago, the job market was in serious question. Hiring had slowed across the board, and unemployment was rising. 

We are in a better spot today, but let’s not forget how quickly things can change from adverse shocks. While manufacturing payrolls have been declining for much of the past year, trade/transportation and construction payrolls have been steadily climbing. Slow down production, and you risk dampening hiring in these sectors (which account for about a third of total payrolls). It’s also not a great time to find a job – average time unemployed is at a multi-year high.

Then, there’s housing. The forces working against homebuyers are simply insane right now. Policy uncertainty in an era of solid growth will keep long-term rates relatively high, which keeps mortgage rates elevated. Home construction will become more expensive, as will the cars you buy for your commute and the appliances you purchase for your new house. 

I’ll put it this way. There are technically six main components of GDP growth, and five are arguably affected by tariffs. Unfortunately, the sixth is government spending, and this administration has it out for the federal budget. Here’s a chart of GDP so you can see what I mean:

Prices may rise, and growth may slow. Not a great combo.

But the Federal Reserve will save us, right?

Oh, those stubborn purveyors of well-parsed economic insights and interest-rate powers? 

Maybe.

When asked about tariffs, Fed chair Jay Powell has generally deflected the question, but he’s mentioned multiple times that tariffs are a scenario that Fed officials sketched out in the Teal Books, a document for each Fed meeting with detailed outline of all the economic forces to consider plus alternative scenarios that the Fed thinks through. Indeed, in 2018 and 2019, higher tariffs and a trade war were one of those alternative scenarios.

Well, I read through the Teal Books so you don’t have to. In 2018 – the first bout of the trade war – tariff scenarios were treated more like growth shocks than inflation problems. The Fed wrote multiple times that there would be a willingness to “see through” higher prices related to tariffs because any resulting inflation would be “transitory” – or disappear quickly.

Obviously, the world has changed a lot since then. “Transitory” is a running joke on Wall Street, and the Fed thinks inflation is a much bigger risk than six years ago. Therefore, the Fed probably has less of a bias to cut unless the job market falls apart quickly.

Shoot. I’m just gonna tap out. No more investing for me.

This is not how it works, my friend!

I get it. The world feels especially volatile right now. 

We may be stuck in the great wait for a bit longer. And you may not be able to buy a house for a while. These are serious problems.

But you cannot sit out while you watch these headlines unfold. While sitting in cash is a bit more logical than it was six months ago, America is still the leading economy in the world with a lot of competitive advantages. You – or Wall Street – have no idea how this plays out. 

You have agency here, too. U.S. stocks alone may not cut it when America is one of a group of countries. throwing punches at each other. Look for the markets that stay out of it. European stocks have struggled over the past few years, but if these tariffs stick around, they may provide the best stability against headline and economic risk.

Lean on what you know in times of uncertainty. Value stocks trade close to their earnings, so there isn’t much to guess about.

Is Trump going to change his mind?

HA. The hardest question to answer.

As of 3:45 pm ET on Sunday, he hasn’t. 32 hours and counting. If he does change his mind last-minute, I will send this novel out laughing hysterically with tears rolling down my face.

Will these tariffs last for hours? Days? Weeks? We have no idea. The possibilities are vast.

If these tariffs are put in place, the stock market will almost certainly hate them, which is an argument for them potentially being short-lived. Because we all know Trump measures his performance through the stock market.

But in a way, this question is irrelevant. Trump is actually doing the thing, and that matters to business owners’ psychology. Corporate America will have to exist in an era of significant tariffs being implemented – and possibly lifted – at a moment’s notice. Cost control and supply chain management will suffer here, and C-suite’s focuses will switch to survival instead of growth.

And in the worst twist of all, these tariffs are another way to inflame the class wars that are raging across our nation today. Americans are historically sensitive to higher prices, and these tariffs could be a powder keg. I hope I’m wrong.

Take care of yourself, and buy some extra avocados today.

Thanks for reading!

Callie

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