If find some of the discourse around tariffs to be downright funny.
You have some supposedly-smart people saying they think tariffs will be ‘lower-than-expected’ and then you ask them what is expected and they have no idea, they don’t even have a concept of an idea. It’s all vibes.
I get this, because it’s so hard to even guess at what’s expected. You also have the White House today that reiterated some of the messaging that’s been leaking out with Leavitt saying about Trump:
“He thinks that some of these numbers would be more conservative than many people are expecting.”
Ok, that’s all cute but when the announcement comes and it’s a different number for virtually every country, how are you going to interpret it?
Some might look at average rates across all countries but that’s nonsense as you need to weight it by trade. With that, you will want to focus on the top-10 countries in terms of US imports:
So what’s expected?
Now, I’ve dug into some informed surveys of investors from Goldman Sachs and Deutsche Bank and they fall in the 9-10% range on the effective tariff rate of all goods (though Goldman’s desk thinks it could be 18%). However inflation pricing would argue for something lower and FX pricing lower yet.
Deutsche Bank survey
Another option is to take Trump’s ‘reciprocal’ promise at fair value. That gets you to a sub-5% level but it depends on whether or not you include agriculture, which the US and everyone else protects. There is good reason to do that given the latest leaks saying non-tariff barriers will be ignored.
I find that compelling — and that’s where I think it will come down — but I don’t have a lot of confidence that’s the number that’s ‘expected’. I think that kind of number will lead to a big risk rally.
Finally, I saw an interesting exercise today from Richard Pricher who looked at it from the revenue side via some Goldman Sachs research. The thinking is that Trump’s ultimate aim is to raise more revenue in order to fund a tax cut.
He notes that duties in 2024, the US raised about $80 billion in tariff revenues with an effective tariff rate of 2.2%. Given steel, aluminum and other tariffs already announced (not autos though), that rate would go to 4.6%. Add in autos, critical minerals and you get to about 6%.
Now you’re raising about $220 billion, annually via tariffs.
They guess they US is looking to raise around $380 billion annually in tariffs. That would mean reciprocal tariffs would have to be set at the 4% level.
Of course, that all assumes there is no substitution and import levels remain static. It also assumes the auto tariffs would remain but that would bankrupt the big-3. So that’s not going to happen on a couple fronts but it’s a fair indication of where it could land. I also think that would point to a relief rally.
If you assume auto tariffs on Mexico/Canada, come down or go away, I think you can put the effective tariff rate at 6%, and you can adjust that to 7.5% to account for easy substitutions.
I think that’s a fair estimate of where the market is right now, though many would still argue it’s 10%.
The next question is where that falls:
Now if you cross-reference this gains the charts above on ‘reciprocal’ tariffs vs goods imports, you struggle to get to even 5%, let alone 7.5%. Again, that argues for a low number April 2 but it still doesn’t tell you what’s expected.
Another strategy: Whatever they can get away with
I think a final way to create an expectation of tariffs is to listen to what the latest leaks say. They highlight tariff rates that are ‘lower than expected’ but also indicate that the US will announce higher tariff threat levels if other countries retaliate.
To me, that indicates that the real strategy isn’t reciprocal or raising revenue explicitly it’s: The USA will set tariff rates as high as it thinks it can without triggering retaliation.
Now that’s far more art than science and requires calculating political considerations in many other countries. In Canada, for instance, an election is ongoing right now and a trade war has kicked off one of the most-unlikely political comebacks I’ve ever seen.
The governing Liberal party has gone from a near-wipeout to a potential majority government. Do you think it’s in their interest to roll over and accept a 5-10% tariff without retaliation?
Is the US doing that kind of calculus on every country? If so, it’s a wild game of brinksmanship and mistakes will surely be made.
To summarize:
- Surveys of market participants show 9-10% on the world and 50% on China (about 20% more on China)
- Market-based inflation numbers show about half globally
- FX-market based numbers barely show any tariffs
- Budget-related estimates land in the 4-7.5% range
- True reciprocal levels land below 5% (ex agriculture)
As Deutche Bank writes:
“So
what is the market pricing on tariffs? It is very hard to tell”
