DEAR DONALD, THIS BATTLE IS LOST

US Tariffs on China currently stand at 145% after the latest increase from the White House, while nearly every other country has been granted a 90-day pause to either negotiate a deal with the US or prepare for the tariffs’ fallout on their internal economies. On Wednesday, everyone was screaming “This is the art of the deal!” when Donald Trump announced he was releasing the pressure from everyone except China, triggering one of the biggest stock market rallies in history. Fun fact: Previous times when similar one-day sharp rallies occurred were in 1929, 2000, and 2008 – not towards the end of the market crises but towards their beginnings.

With all due respect to the macro charlatans out there, what happened on Wednesday this week will not make history as a new chapter of Donald Trump’s book “The Art of The Deal”, but more like “THE FART OFF THE DEAL” of financial markets that, not surprisingly, started to sharply roll over immediately on Thursday. Those who do not learn from history are bound to repeat the same mistakes, and clearly, many don’t study history much anymore in the US and Europe, since what happened could be predicted well in advance, as I (a nobody) have done in the series of articles I wrote on the topic so far:

Since “Liberation Day,” the USD has been down significantly, US stocks have been down significantly, and US Treasuries have been down significantly. Clearly, the US has lost the battle of the tariffs, not only from a financial markets perspective but from a political perspective as well, as it exposed US vulnerabilities while highlighting how China and its financial markets are far more resilient than anyone assumed. Why such a mistake? While Donald Trump is mainly following the strategy used during his first presidential term, the world has dramatically changed since then. While China used the Covid period as an opportunity to reboot its financial system and restructure its internal economy (which was particularly threatened by the real estate bubble that popped in 2018), the US, Europe, and Japan merely bailed out everyone once again by printing trillions of USD in fiat currency and expanding government deficits beyond sustainable levels. False narratives are partly to blame for the tactical miscalculation, such as the one that portrayed China in an economic recession while the opposite was actually happening, as I extensively reported in many articles over the years, thanks to my privileged observation point outside the fog of Western mainstream media.

What should the US do now? Instead of borrowing a page from “The Art Of The Deal”, Donald Trump should consider reading Sun Tzu’s “Art Of War”. This battle is clearly lost, and it would be wiser to retreat to a safer position, reconsider the strategy, and resume fighting the war from a stronger position. However, admitting defeat is something you can hardly expect from a politician, which is why I am worried the US will continue throwing troops into the current battlefield when all its opponent has to do is stand still and keep slaughtering them from its higher ground.

What Donald Trump fails to realize still, or perhaps he has but cannot acknowledge it publicly, is that the real cause of this massive trade imbalance is primarily US companies that have, over many years, shifted their supply chains to far cheaper countries while continuing to sell goods at high prices in the US, enjoying fat margins and profits without paying their fair share of taxes back to the US, ultimately impoverishing their own country. The US has had to resort to increasingly larger deficit spending to keep supporting its population. Many people claim that the current US administration is making a mistake by not considering the “export of services” like computer software in its calculations. This statement is simply misguided because these US companies continue to keep their cash and profits made abroad offshore to minimize their tax bills; hence, these cannot be considered “exports” since payments aren’t making their way back to the US. Let me be clear: I’m not saying the US should raise corporate taxes, but rather enforce the current rules and require all those companies who have greatly benefited from the US to pay their fair share. Wouldn’t this already provide some relief to the deficit spending?

One significant legislative change required would be to consider stock buybacks as equivalent to dividends and thus start charging a capital gains tax on them. Aren’t both distributions of wealth to shareholders? Then why is one taxed and the other isn’t? People might argue that stock buybacks that boost the share price of a company will be taxed when the investor sells them for a profit, but this is completely wrong. Those who really benefit from stock buybacks are company insiders, and if you look at the amount of share awards distributed to insiders by a company each year and compare those to the buybacks, you will see how many companies simply repurchase shares to compensate for stock awards to management and employees. These would pay only a fraction of the taxes due if the total cash used for buybacks was instead taxed in the same way as dividends.

Companies will hardly bring their supply chains and manufacturing back to the US as the president wishes because that would require billions of dollars in investment and the write-off of industrial assets held abroad, and would ultimately yield far lower margins. It would be both expensive to manufacture the same goods in the US and difficult to increase prices further when the vast majority of the population is already at its spending capacity limit. Furthermore, this would immediately impact their stock valuations, creating direct damage to the wealth of company management, which in the current economic structure is incentivized to maximize company share values as much as possible in the short term. Clearly, all in all, there is no incentive for US companies to support Donald Trump’s plans.

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