Markets and penguins

Tariffs I. Long-sighted or over-reacted?

While it remains unclear what the point of the Trump tariff episode is, the markets had either (i) underestimated their duration and reach, or (ii) over-reacted.  Some facts…

The Petersen Institute for International Economics in Washington DC estimates that trade adds USD2,500 per household annually where household GDP is USD210,000 in 2024.  Trade adds 1.2% to household GDP.  This is a single shot to household income and not an increase in growth, so that the capital effects of trade are felt once.  If all the benefits from trade are lost through tariff hikes then this amount constitutes the maximum loss that the US economy would suffer.  US stockmarkets in aggregate measure the present value of US GDP so a fall of 1.2% should be the maximum cost to markets from the tariff imposition.

On this metric, the US and Global stock markets have over-reacted, falling more than 5% since the tariffs were announced.  Of course, the taxes will not curtail all trade with the US which means that the real cost to GDP will something less than 1.2%.  The market looks like it has over-reacted and so represents a good buy.

Tariffs II.  Happy little penguins

Arbitraging tariffs is simple but you shouldn’t boast about it.  China has built a presence in Canada and Mexico, manufacturing and assembling goods to benefit from the North American Free Trade Agreement rules.  This arb has been effectively reduced by imposing tariffs on the US nearest neighbours.

The principle is that trade will flow from nations with the lowest tariff rate.  During Trump’s first term, some countries, such as Australia, received exemptions from the tariff taxes.  This made Australia a conduit for commodities like aluminium for can manufacture.

The tariff arbitrage this time around must negotiate a 10% minimum tax on every country, island and protectorate.  The media made fun of the 10% tariff imposed on Heard and McDonald islands in Antarctica and populated solely by penguins.  These protectorates are still advantaged with the minimum tariff of 10% so expect that someone will quietly route cargoes of stuff through these jurisdictions.  The penguins are about to get rich.