Trump’s Absurd Tariffs: Economic Folly or Geopolitical Genius?
Decoding the strategy behind Trump's extreme tariff approach
"Get your facts first, and then you can distort them as much as you please."
– Mark Twain
Let me start by admitting openly. I am no expert on economic or geopolitical affairs. But while others stare anxiously at fluctuating stock prices, I prefer to use my head to read between the lines. Also, I caved and used Ghibli-style illustration via ChatGPT to add some creative flair to this post.
President Trump's recent announcement of steep tariffs, ranging up to 50%, has shocked global markets. The math behind these tariffs has been widely criticized, and rightfully so, as fundamentally flawed. But beneath this apparent absurdity lies a calculated geopolitical strategy.
The Flawed Math Explained
Trump’s administration justified the tariffs by applying a seemingly precise "formula" based on trade deficits. However, this calculation is critically flawed. The administration incorrectly used retail price elasticity instead of the correct import price elasticity. This mistake inflated the tariff rates to nearly four times their actual level.
You can read more about this here.
Simply put, Trump's team multiplied the responsiveness of retail prices to tariffs by import demand elasticity, a mismatch akin to comparing apples with oranges. Economically, this formula is indefensible, and even a middle-school student could spot the error.
But Was This "Mistake" Intentional?
Behind the facade of flawed economics, there's a clear strategic intent: Trump’s administration deliberately chose exaggerated tariffs to alarm trading partners and pressure them into swift negotiations.
Countries hit hardest by these artificially inflated tariffs are precisely those with whom the US maintains significant trade deficits. The underlying logic is straightforward: create intense economic discomfort to urgently bring trading partners to the negotiating table.
Trump's Real Game: Geopolitical Leverage
Recent tweets by President Trump further reveal this strategy. After China retaliated with a 34% tariff increase, Trump swiftly threatened a further 50% hike unless China immediately backs down, explicitly stating that all talks with China would cease otherwise.
Simultaneously, Trump confirmed active negotiations with approximately 50 other countries. Japan, for instance, is already sending a top delegation to negotiate, highlighting automotive and agricultural imbalances. The European Union, Vietnam, and numerous other nations are reportedly moving towards zero-tariff negotiations, clearly responding to Trump’s aggressive positioning.
The Market Panic Was the Point
The global economic uncertainty, stock market volatility, and widespread media coverage weren't unintended consequences. These were precisely the intended outcome. Trump wanted the world's attention and he got it.
The aim isn't to maintain permanent high tariffs, nor to isolate the US economically. Instead, this approach is a tactical move intended to reshape international trade agreements significantly, positioning the US more advantageously.
Opportunity Amid Chaos: India's Potential Gain
Amid the global panic lies an overlooked opportunity for countries like India. Market overreactions create strategic buying opportunities. With global focus heavily on US-China tensions, India could benefit by positioning itself as a stable, attractive trade and investment partner. People who know us also know that we are continuing to stay 100% invested and have no intentions towards moving to cash. We can obviously be biased due to this, and we do take a note of the same in our day to day understanding of markets.
Bottom Line
Trump’s absurd tariff formula isn't a sign of economic incompetence, it’s a calculated geopolitical chess move. As global trade partners rush to negotiate, it’s clear the endgame is about leveraging maximum advantage, not shutting down trade.
Investors and policymakers would do well to understand this distinction and look beyond the chaos to identify strategic opportunities amid the volatility.
If you are interested in accessing our research and joining a network of well-informed investors, please contact us at Gaurav.a@nineonecapital.in