There is now certainty that this White House trade strategy is both nonsensical and unachievable. Look, we can all accept that China is a menace and a huge cheater, but it would be preferable if the White House specifically dealt with Xi Jinping. One can certainly make the case that Mexico was the big winner from the NAFTA sucking sound (not Canada). But when President Trump states that the trade plan is “our declaration of economic independence,” what he is, in effect, saying is that he wants America to be “independent” - or “liberated” - from bilateral deficits with all countries running such gaps against the U.S.

As a result, just about any country in the world that runs trade surpluses with the United States just faced a brutal and unanticipated assault in terms of magnitude — 57 in total (with a range of 1% to 40% of penalties layered on top of the 10% baseline move — amazingly, Russia and North Korea were not on the hit list). While I don’t like to label this a “tariff” rate (I define what this is below), it basically amounts to 22%, and that takes out Smoot-Hawley in 1930 and is the highest since 1910 (a big shock from 2.5% before this current trade war was launched).

Only when the impact hits the U.S. economy will what I am about to say resonate fully, and investors are typically ahead of the data. So far, the markets understand what is going on, which is a trade policy built on a full set of inconsistencies and unachievable objectives. It is not confusion. Investors know what the gig is. That everyone is being conned into believing that the tariff war is “reciprocal.”

Far from the case.

Leveling the playing field was initially thought about tit-for-tat tariffs, but it really is all about a complete elimination of ALL trade surpluses that countries run against the U.S., the reserve currency of the world.

President Trump said he loved that word “reciprocal” when he spoke at the Rose Garden on Wednesday and even took the time to define it for us. But let’s look at the numbers. What is reciprocal about imposing a “tariff” of 10% on the U.K. (as an example) when it has a tariff rate of 0.7% on imports of U.S. goods? That is what we should be asking ourselves. Or a 10% tariff now imposed on Australia when it has no tariffs at all on imports of U.S. merchandise.

How is that reciprocal? Reciprocal would mean a 3.9% tariff on Korea, not 25%. It would mean a 3.9% tariff on Japan, not 24%. India got slapped with a 26% tariff even though its tariff rate on the U.S. is 5.5%. What is with Vietnam being hit with a 46% “tariff” when its comparable on U.S. products is… wait for it… 2.9% (in a $30 trillion U.S. economy, Vietnam runs the grand total of a $123 billion trade surplus with the U.S.)?? Thailand charges a 6.2% tariff rate, and the U.S. just slammed it with a 36% punitive “tariff.” Even the smallest economies in the world, like Myanmar, just got hit with a massive 44% “tariff” rate; Madagascar with a 47% levy (impoverished nations about to become a whole lot poorer). And the biggest regions as no stone was left unturned — like the EU, which has a 1% tariff on U.S. imports and just got slapped with a 20% tariff by the administration. None of this is “reciprocal,” and none of it makes any sense. At least to me.

So, I must make this very clear. These are not really “tariffs” that are being imposed. These are actions aimed at completely eliminating the U.S. bilateral trade deficit with every country. That is why the “tariff” is really not that at all but rather a “ratio” of every country’s trade surplus with the U.S. divided by the exports of that country — it is that number that the White House expects to rid the United States of its trade deficits; not just at an aggregate level, but for every country that runs a trade surplus with America. This is why these numbers, 10%, 17%, 20%, or 25%, are so huge. They are ratios.

And to repeat, they are ratios that are intended to cause trade deficits to go away entirely (depending on the elasticities). What that means is that every country can drop its tariff rate to zero, and it won’t matter because that will not cause the bilateral trade gaps to disappear — and that is the endgame for this administration. So, the EU has stated it will wait four weeks before responding as it seeks to negotiate with the United States, but what is there to negotiate because lowering or even eliminating tariffs, won’t matter (as we saw in the case of Israel which did exactly that and still faced a 17% penalty).

And the question is, why? Because the President and his team believe that trade deficits are “subsidies,” pure and simple. And that, my friends, is patently absurd.

Again, to be clear, what the White House just unveiled are NOT “reciprocal” tariffs by a long shot. They are rooted in a misapprehension that trade deficits are “subsidies” (which the President keeps referencing when he talks about Canada). Which they are NOT.

Why does the U.S. run trade deficits with so many countries, and why is it natural?

The United States is the largest and richest economy on the planet. This is all about the laws of large and small numbers. For small countries, it is next to impossible for them to import all that much given their smaller populations and GDP bases. For many countries, what they export to the U.S. may be big in relation to their economies but very small relative to the size of the U.S. market. The math just doesn’t work. There is no way they will be able to boost their imports sufficiently to cause a balance in bilateral trade. Maybe they will just end up shipping less to the U.S. market but then consumers and businesses in America will be deprived the products they have been used to buying all these years and decades. And don’t expect businesses to leap the “tariff wall” or domestic producers step into the fray since many of these goods aren’t even produced at the U.S. — normally a country puts on a tariff for protection purposes to support the local industry but there are simply too many products that American consumers want that just aren’t made at home. And as Adam Smith and David Ricardo taught us, there isn’t anything wrong or abnormal about the theory of comparative advantage… it is a truth. What is abnormal is this huge and unnecessary shock, which was not top of mind for voters for last November (the cost-of-living, the border, and health care were the top concerns; everything else, including trade/tariffs was tied for dead last). But more importantly, given the relative size of the U.S. to many other countries, it makes zero sense to expect anything but deficits with these nations. In other words, the law of large and small numbers here is going to make it next to impossible for every bilateral deficit to banish. A wholly unrealistic expectation.

The U.S. economy is built on consumerism. And there is a huge correlation between consumer spending and imports. No national sales tax and a system that encourages an extremely low personal savings rate. The rest of the world has no such culture and runs much higher savings rates. Perhaps the White House should be pressuring these other countries to pursue policies that encourage households to spend nearly 100% of their incomes. Then again, I’m not so sure this would play well in parts of the world that treat thrift and savings a little differently. Not to mention the reality that while you can start a global trade war, you can’t force the rest of the world to change their culture.

The U.S. dollar is the reserve currency of the world. It is perfectly normal for the reserve currency country to be running current account deficits with other countries. Why? Because the status of trust and stability that comes with being the reserve currency leads to capital account surpluses. And these surpluses, because of the wealth and income streams they cause, flow through into a current account deficit via the import channel. The capital account drives the current account and, by definition, the balance-of-payments must balance. This, you never hear about despite the fact that it is an incontrovertible fact that the balance-of-payments must always balance.

To emphasize that last point: What the Trump Team doesn’t seem to realize is that for the reserve currency, the deficit on trade necessarily coincides with capital account surpluses and it is those accumulated surpluses (to repeat: which by definition must balance the current deficit since the balance-of-payments have to balance), that have led to the fact that foreigners hold $15 trillion worth of U.S. equities. That is one-quarter of the market cap. And now set to unwind.

What are the ramifications? Well, this new trade policy is not going to end up getting rid of the deficits. I already made that point. President Trump now says he is willing to “negotiate,” but that is only a reaction to what has happened to the equity market which he recently said he wasn’t watching. But the general public, with a record 70% exposure in its financial asset mix to the equity market, is watching closely. So, if I am correct that the policy just unveiled will not cause the trade deficit to be eliminated, these punitive “tariff” rates — more like forced relative price changes — are very likely here to stay. That, in turn, is going to cause a sharp upward level shift in the U.S. price and cost curve. And then that will pose a serious squeeze on real personal incomes, consumer spending, profit margins, and business investment. That is economics in its most basic form.

If these policies stick, there is little doubt a recession will be staring us in the face. In contrast to 2022 and 2023, there are no more excess “Biden” pandemic savings left for the household sector and no fiscal stimulus is coming around the corner. These are what helped prevent a recession in the face of the most acute tightening in monetary policy since the early 1980s. All the while, the current Fed is intentionally keeping policy tight. In late 2022, there was also a huge catalyst for enthusiasm and an end to the bear market as well as recession risk — which was the advent of generative AI, which helped generate a wave of wealth creation and business investment. Will there be another major inflection point in the technology curve coming our way? Or is this trade shock going to tip the economy into recession with no apparent offset this time to cushion the blow? My money is with the latter. We haven’t even seen all the retaliation yet, but suffice it to say that this is the single biggest negative trade shock since the 1930s.

What if I’m wrong? Well, just look at the behavior of the U.S. dollar as it enters a tailspin — having incurred its steepest decline on record the day after the Rose Garden announcement. If you believe that this trade policy will succeed, then you are ipso facto of the view that America will end up relinquishing its role as being the reserve currency. Maybe that is really President Trump’s hidden agenda because if he believes that trade deficits should be eliminated, then in the name of consistency, he must also want to see the capital account surplus go away. To reiterate, this is the byproduct of being a reserve currency — capital account surpluses that help bring down the cost of capital and underpin superior rates of return on assets. Without the trade deficits, all this vanishes. This is the “burden” of a reserve currency status — trade deficits caused by capital account surpluses. Both are mirror images of each other. But if this is the game plan, then I suggest everyone just keep buying gold and silver.

And if you think we emerge unscathed from all this instability and do not go into recession, then stocks are a “buy” and “bonds” are a sell. But if you can see a recession around the corner, as I do, then know that the financial markets — stock valuations, credit spreads, and Treasury yields — have barely gone halfway towards pricing one in.

U.S. equities are not yet fully pricing in the global trade war and its negative impact on growth. Hence, we recommend adjusting sector exposure to navigate these risks and hide behind the names with strong fundamentals and a defensive nature. One of the key strategies that stands out in that context is long Utilities (defensive growth, not exposed to tariffs) and short Consumer Discretionary (high exposure to tariff threat, headwinds from weakening consumer sentiment).

David Rosenberg is founder of Rosenberg Research.

Related:

Andrew Coyne: Trump’s tariffs are what he says they are: weapons of blunt-force, wrong-headed protectionism

David Rosenberg: Canada is at economic war. It’s time for Ottawa to make these bold moves to save the country

David Rosenberg: Trump’s misguided approach to trade ignores uncomfortable truths - and puts portfolios at great risk