Stocks too Complacent About the TACO Trade

 Last week brought with it the International Trade Court opinion declaring Trump’s use of the Emergency Economic Powers Act declaring his reciprocal tariffs on all of America’s trading partners to be illegal, the arrival of the new acronym TACO and a breakdown in trade talks with China. Coined by Financial Times columnist Robert Armstrong, TACO stands for “Trump Always Chickens Out.” That was brought home by Trump’s sudden pullback from his 50% tariff on the EU. (See: https://shulmaven.blogspot.com/2025/05/debt-tariffs-and-stocks.html ) When Trump was asked about it at a White House event he reacted very defensively because the one thing a bully can’t stand is being called “chicken.”

While the trade court ruling is being appealed, the Trump team said it would use all of the other powers available to him, of which there are many, to maintain his high tariff wall. On Friday he acted by doubling the tariffs on steel and aluminum from 25% to 50%. That will work as a dagger in the heart of America’s steel and aluminum using industries, namely automobile, aircraft, and machinery. This certainly won’t help Boeing, America’s leading exporter, on its road to recovery. 

The steel and aluminum tariffs will further estrange Canada from the U.S. where its direct exports will be clobbered, and it will make Canadian manufactured autos and parts even more expensive. If Canada weren’t heading for a recession before, it is now.

 

My guess is that in the long run the TACO trade maybe right, but in the short run, Trump will keep tariffs much higher than the 10% the market now expects. Thus, when the 90 day pause on high tariffs rolls around on July 2^nd, a whole new round of high tariffs will be put in place. Just when investors thought it was safe to go back in the water, a dangerous riptide will be pulling away from the shore

And What did you do in the Trade War?

With his proposed tariffs on $50-$60 billion of Chinese goods, it seems that President Donald Trump wants to start a trade war. As if on cue the S&P 500 dropped 2.5% today and export oriented Boeing and Caterpillar declined by more than 5%. To be sure the U.S. has serious issues with China with respect to trade in general and intellectual property specifically, shooting first and asking questions later is hardly the best way to settle a trade dispute.

As a result investors are rightly worrying about the broad imposition of tariffs on China on inflation and growth. Simply put a tariff is a tax that will increase inflation and slow growth as the Chinese retaliate against American made goods. It is a recipe for stagflation that will hardly be good for stocks.

Of course Trump's announcement could be an opening gambit in a very complex negotiation. That was the case with his steel and aluminum tariffs a month ago. He has since exempted our major trading partners in those commodities namely Canada, Mexico, Brazil and South Korea. Thus it is no surprise that the steel and aluminum stocks have given back all of the gains they made on the initial tariff news. But make no mistake Trump is playing with fire, and a good chunk of the global trading structure could burn down.