Holding your nerve in Donald Trump’s tariff maelstrom

Writing this newsletter used to have a predictable process. I would get the bulk of it done on Thursday and Friday and then polish, format and file it on Sunday night after the kids were in bed. These days, thanks to Donald Trump’s 24-hour trade policy circus (see the FT Trump trade tracker here), I could start writing it at dawn on Monday, but it would be out of date by the time we hit send at 12.30pm UK time. A case in point: yesterday Trump added another weird threat of an extra 10 per cent tariff on anyone following the “anti-American” policies of the emerging markets Brics grouping. Me neither.

This week is supposedly D-Day, the 90-day deadline for the bogus “reciprocal tariffs” to be reimposed. Today I’ll look at the tactics of various trading partners, and what I think are mistakes by the EU. Charted Waters, where we look at the data behind world trade, is on the FT’s amazing scoop on the bizarre and repellent blueprint for the future of Gaza.

For you, dear reader, another quick-fire quiz: how many of the threatened letters to trading partners will Trump have sent out by midnight tomorrow US time? Deadline to answer 5pm UK time/12 noon US time today: [email protected].

Dealing with the Donald

Before we go any further, let’s remember a few things. Whatever comes out of Trump’s “reciprocal tariffs” idea, or indeed his sectoral tariffs on cars and so on, isn’t actually going to work. They won’t close the US current account deficit, they won’t lead to a manufacturing revival, and they won’t replace revenue from federal income tax. The following discussion is essentially about trading partners limiting trade dislocation and managing the politics of responding to him.

Let’s also recall: Trump’s tactics are extremely random. He was not going to get 90 deals in 90 days. He said he was going to send out letters from Friday telling countries what their tariffs would be. They didn’t seem to have arrived by Sunday night.

And finally, let’s remember he has, by my calculation, at least seven targets: reciprocity, revenue, restriction (that is, protectionism), the current account, clientelism, coercion and confusion. At the moment, as per a recent story in Politico, he’s actually enjoying creating uncertainty and making himself the centre of attention. Scott Bessent, Treasury secretary, has been saying for more than a week now that Labor Day is a more likely target date than July 9. (Labor Day this year is September 1, though come to think of it, Bessent didn’t specify the year.)

I said the week after the suspension in April that trading partners — particularly the big ones — should hold off proffering concessions, especially if they aren’t guaranteed anything back. The first rule of trade talks, and this isn’t as facile as it sounds, is don’t negotiate with yourself. But I’m a fair-minded man (on occasion), and I do realise I don’t have to get re-elected or reappointed. For those that do, it might be politically impossible to do nothing. But for God’s sake work out a strategy.

China did the best in facing the US down (but then China has an excellent weapon of leverage in the form of rare earths exports). What the UK did wasn’t great, especially the violation of the most-favoured nation principle. But politically you can see why a relatively small open economy with military and security dependencies on the US would take a chance on a legally nonbinding agreement, and trade off some smallish beef and bioethanol quotas for protecting its niche but politically salient car and steel exporters.

Ditto — but even more so — Vietnam and Cambodia, which are apparently offering big cuts in tariffs on imports from the US in return for favourable treatment of their exports. They’re massively dependent on the US market, and it’s hard to see US exporters displacing much domestic production in their economies anyway.

The big disappointment is the major economic power (other than China) that might have stood up for the world trading system, the EU, has been unable to maintain a coherent trade policy position from the beginning. Nor has it managed to bring together a coalition of countries to resist Trump collectively.

Again, you can see why Brussels might have gone for a pragmatic deal along the UK lines, although Trump’s animus for the EU would have made that hard. It also has the size and flexibility to follow my preferred strategy of doing nothing and letting Trump hurt the US economy. It could have really gone for broke and retaliated with massive tariffs to try to cause a big financial market reaction and get him to abandon the campaign.

But instead of choosing and sticking with something, it has damaged its credibility by contradicting itself. Ministers set a principled red line of opposing the 10 per cent baseline tariff. Then negotiators contradicted it a couple of weeks later. The EU seemed to veer back towards the harder line a few weeks after that.

There are evident divisions among member states and the European Commission. Germany’s Chancellor Friedrich Merz has pressed for a quick deal that protects (guess what?) German car exports. Other EU countries think that’s too hasty, and the commission has told him it’s delusional.

The formation of EU trade policy being messy and iterative isn’t exactly a massive news story. But the bloc seems to be treating dealing with the Donald as a normal trade negotiation, where it has time to thrash out a detailed mandate that commands consensus among member states and engage in highly technical talks that take as long as necessary.

In fact, it’s dealing with a capricious interlocutor with malleable deadlines and an aversion to legally binding deals. The EU needs to be consistent in principle and fast and flexible in tactics. It’s not really been either.

Carbon capture

While we’re having a pop at the EU, let’s also throw in its announcement last week that revenues from the carbon border adjustment mechanism (CBAM) will be used to compensate EU exporters who complain they are disadvantaged in overseas markets.

European companies have to pay emissions charges under the emissions trading system (ETS), but they compete with foreign producers who are not similarly taxed. Regardless, compensating them with CBAM revenue is a really bad idea. The EU (of course) claims the policy is World Trade Organization-legal, but if it’s regarded as a subsidy contingent on exports, it will be prohibited outright.

If anything, WTO illegality isn’t the worst thing about it. CBAM has already annoyed a bunch of low- and middle-income countries by affecting their exports, part of a suite of policies that look from the emerging world a lot like green neocolonialism.

Using import duties to help EU companies compete against businesses from those countries in their own or third markets is likely to go down badly. As David Kleimann of the ODI think-tank says, the plan is “inevitably inflammatory”. He adds: “For emerging and lesser developed economies, using CBAM revenues to refund ETS-induced domestic costs adds insult to injury. It repurposes funds extracted from global south industries to — likely illegally — advance the competitiveness of EU exports on the international marketplace.”

The EU’s claim to be a champion of development is crumbling year by year. This will be another chunk of credibility falling off the edifice.

Charted waters

Here’s a graphic from the brilliant FT scoop that the Tony Blair Institute (despite its denials) helped the consultancy BCG with its bizarre plan to turn postwar Gaza into a trading hub. Note the plan I wrote about a year ago emanating from Israeli Prime Minister Benjamin Netanyahu’s office, which underlined the creepiness behind the more ideological zealots of the freeport movement.

Trade links

• A new study in the Lancet medical journal suggests the dismantling of the US Agency for International Development, as being carried out by the Trump administration, will cost more than 14mn premature deaths in poor countries by 2030. Fourteen. Million.

• A commentary by the CSIS think-tank looks at what other countries are doing to liberalise trade in the face of US protectionism.

• Data suggests that, as happened before, China is routing exports via south-east Asian economies to the US to avoid tariffs.

• The Brics grouping of low- and middle-income countries has never achieved much except annoying Trump. As this weekend’s summit showed, letting in more members has just confused things further.

• The FT looks at the limited restructuring of the world economy that trade tensions have wrought so far.

Trade Secrets is edited by Harvey Nriapia