The first salvo has been withstood. The Liberation Day surprise threw the markets for a loop like a haymaker to a complacent champion, and they played rope-a-dope for a little bit while trying to see what was next and how to adjust. We know what happened. Jabs and feints and rushing up and falling back. Some blows have landed in that tariffs are still on and still high, and some damage has been done, but the economy, and business overall, has regained its footing and is standing firm and ready.
Deadlines come and deadlines go. We know what the plan is now, or at least think we have a better guess. Put on punishing tariffs that hurt immediately, start collecting the money, and give the impression that it is a for-sure that they will stay on unless our trading partners come to the negotiating table in earnest. Set deadlines to keep the pressure on but extend them if there are good faith negotiations. Put them back on if you don’t think you are getting the kind of traction that you want. So far, the markets seem to think this is working OK, with a recent fund manager survey suggesting that although a trade war triggering global recession remains the biggest tail risk, it is down to 47% from 80% in April.
Several giant butterflies flapping their wings. But slowly, for now, cooling themselves, for the 90-day period that ends July 9th. The weather in far-off lands is not being catastrophically affected yet. We now have ~75 days over which the effects of the tariffs that are currently in place and the planning that companies have been doing, have been digested. Companies have reported 1Q25 earnings and commented on how they think things are going. It’s hard to separate out the impact of the tariffs from everything else, but earnings growth came in much better than expected, and there was a lot of good talk about mitigation efforts through supply chain reconfiguring, pricing adjustments, and operational efficiency tweaks. But its early stages, and very dependent on how the negotiations play out. The second quarter will be over and the reporting for that just beginning when July 9 rolls around.
Other than a potentially better understanding of how the game is being played and what the stakes are, there hasn’t been a whole lot of progress on any durable details. Although in the meantime, the US effective tariff rate currently rests in the mid-teens, the highest since 1937. It is an open question as to whether these will ultimately remain. Perhaps serious, earnest talks will result in rationality, and in the end, trading structure and incentives will be improved somewhat at the margin and the environment for realizing the benefits of comparative advantage will be improved.
There’s a lot to negotiate. Trade is complicated. It’s not just tariffs of course. It’s self-reliance, it’s critical items for security and economics, and it’s subsidies. It’s jobs, and it’s environmental and other regulatory considerations, and when it’s OK for them to be the same and when it’s OK for them to be different. It’s about being able to sell into each other’s markets. There are a lot of numbers and statistics, but it becomes harder when it comes down to perceptions and values and views on what the right way to run the world is. One of the thornier issues has been export controls on cutting-edge innovative AI technology (to China) and access to rare earths and high-tech magnets (to the US).
July 9 will come and go. Maybe a meaningful deal with a trading partner will get done by then. We haven’t seen one yet if you don’t count the UK, which left some important issues unresolved. Maybe several will get done. Maybe none will get done. There were hopes that incremental progress would be made at the June 15-17 G7 meeting, but that didn’t happen. Perhaps one of the most significant statements so far has been Treasury Secretary Bessent’s, that he is willing to “roll the tape forward” for those countries that are negotiating in good faith. Who wouldn’t want to be perceived as doing that by July 9th? There was that little flare up with China when the perception was that they weren’t (and their perception of the US was that we weren’t). We had a blip there and now we’re back to stalemate.
It will continue to be a process. Realistically, the workout of trade deals will take at least into the fourth quarter and likely longer. Then the effects on actual trade and businesses will take some time after that. We’ll be evaluating the ups and downs and watching those butterflies.
By Thomas Martin, CFA, Senior Portfolio Manager
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