Why US Car Made Here Can Actually Incur A Higher Tariff Rate Than A Japanese Car Sent Directly Here

Key Concepts:

• 15% Tariff on Japanese and potentially European exports to the US.
• Market reaction: Nikkei and Yen rally, S&P 500 and Dollar flatten/decline.
• Incoherency of US tariff policy: Higher input tariffs for US manufacturers compared to tariffs on finished imports.
• Currency manipulation and the Plaza Accord.
• President Trump's need for headline deals to maintain credibility.

1. Initial Market Reaction to Japan Tariff

• The US and Japan agreed to a roughly 15% tariff on all Japanese exports to the United States.
• The immediate market reaction was surprising: the Nikkei (Japanese stock index) spiked, and the Yen rallied.
• Simultaneously, the S&P 500 and the US dollar experienced a flattening or slight decline.
• This reaction seems counterintuitive because typically, a country whose exports become more expensive would not see its market perform better than the country receiving the tariff revenue.

2. The Incoherency of US Tariff Policy: Auto Sector Example

• The speaker argues that the US tariff policy is incoherent when considering the totality of the situation.
• Using the auto sector as an example, the US imposes a 15% tariff on Japanese car exports (e.g., Toyota).
• However, the US also has tariffs on steel (50%), copper (50%), aluminum (50%), Canadian imports (25%), Mexican imports (25%), and Chinese imports (55%) used by US automakers like GM and Ford.
• Because US automakers rely heavily on overseas supply chains, these input tariffs make it more expensive for them to produce cars in the US than it costs Toyota to export cars from Japan to the US.
• This explains why GM's stock was flat or down while Toyota's stock was down more significantly.
• The speaker emphasizes that "the market is the sharpest and most intelligent pricing tool on earth" and quickly recognized this discrepancy.
• The lobbyist group for the three big automakers in Detroit opposed the deal, confirming the speaker's analysis.

3. Potential Europe Tariff and Heavy Machinery

• A preliminary announcement suggests that Europe is also agreeing to a 15% tariff with the United States, similar to the Japan deal.
• Germany, a major exporter of heavy machinery, relies on steel, aluminum, and copper.
• The speaker questions the logic of imposing a 50% tariff on these materials for American factories while only imposing a 15% tariff on German exports.
• The speaker reiterates that the market reaction validates this point, with countries agreeing to tariffs often seeing their markets rally.

4. Currency Manipulation and the Plaza Accord

• The speaker notes that the US, in early trade talks, complained about other countries allowing their currencies to depreciate against the dollar, even calling Japan a "currency manipulator."
• However, none of the announced trade deals include concessions on currencies.
• The speaker references the Plaza Accord in the 1980s, where G7 countries agreed to weaken the dollar to make American exports more competitive.
• The speaker also mentions that President Trump initially chose Scott Bessant, known for working with George Soros (a famous currency trader), as his treasury secretary, leading many to believe that currency practices would be addressed.
• The Yen has fallen 40% versus the dollar in the past couple of years. The euro is down almost 35% versus the dollar since just a few years back.
• The speaker finds it strange that currency issues were not addressed in the trade deals, as this could have helped the United States' export capacity.

5. Trump's Need for Headline Deals

• The speaker believes President Trump is realizing that delaying deals is hurting his credibility.
• Therefore, he is announcing deals that are similar to the tariff rates announced earlier.
• For example, Europe at a 15% rate is not much different from the original 20% rate.
• The speaker suggests that Trump needs to announce some kind of deal to alleviate pressure and avoid a reputation for not following through.
• The market is all about optics, and reputation is crucial.

6. Conclusion

• The speaker concludes that the US tariff policy is incoherent, potentially harming US manufacturers more than foreign exporters.
• The market reactions and the opposition from US automakers support this view.
• The speaker also finds it strange that currency manipulation was not addressed in the trade deals.
• Finally, the speaker believes that President Trump is rushing to announce deals to maintain credibility.