"Reciprocal Tariffs 2.0" is coming: 15% is just the starting point, up to 50%! As the market bets big, Trump's tariff calculations are also upgrading

According to the Zhitong Finance APP, U.S. President Donald Trump stated that before the final negotiation deadline on August 1, he personally set the so-called reciprocal tariff rate at no less than 15%, indicating that the lower limit for tariffs imposed by the Trump administration is rising, significantly up from the 10% benchmark that caused a market crash after "Liberation Day."

"We will impose direct and simple tariffs ranging from 15% to 50% on them," Trump said at a global AI summit in Washington on Wednesday local time. "There are several countries—50% is because our relationship with those countries is not very good."

Trump's declaration of a starting point for reciprocal tariffs at 15% represents his latest shift in attempting to impose tariffs on nearly all U.S. trading partners, further indicating his intention to impose tariffs on goods exported to countries that have not yet reached a trade cooperation framework with Washington.

Earlier this month, Trump stated that over 150 countries worldwide would receive a letter specifying a tariff rate of "possibly 10% or 15%, we haven't fully decided yet." Compared to previous expectations, this represents an increase. U.S. Secretary of Commerce Howard Lutnick stated in an interview with CBS News on Sunday that the benchmark tariff for small trading nations, including "Latin American countries, Caribbean countries, and many African countries," would be 10%. When he first announced the global reciprocal tariffs in April, Trump proposed a uniform 10% tariff on nearly all countries.

Although Trump and his policy advisors initially hoped to finalize multiple trade cooperation agreements, the U.S. President has consistently referred to these tariff letters themselves as "agreements," suggesting he has no intention of engaging in repeated trade negotiations. However, he still offers countries the possibility of reaching agreements to significantly lower tariff rates.

On Tuesday, Trump announced a significant reduction of the threatened 25% tariff on Japan to 15%, in exchange for Japan lifting restrictions on certain U.S. products and agreeing to support an investment fund of up to $550 billion. Other countries, including South Korea, India, and EU member states, are still working to reach agreements before the higher reciprocal tariffs officially take effect on August 1.

On Wednesday local time, Trump stated in an interview that he would impose "very, very simple tariff rates on certain countries because there are too many countries that have failed to reach trade agreements," adding, "We cannot negotiate agreements with every country."

However, he mentioned that trade negotiations with the EU are "very serious," emphasizing that if the EU agrees to open up to U.S. businesses, the U.S. will allow lower tariff payments. "If they agree to open this alliance to U.S. businesses, then we will let them pay lower reciprocal tariff rates," Trump stated in the interview.

For the global stock market, the risk is: the more the market bets on the TACO strategy, the more Trump dares to raise taxes.

The current record-high U.S. stock market and MSCI global stock index are caught in an extremely dangerous policy feedback loop—market indifference or even disregard for Trump's tariff policies is providing space for the Trump administration to impose further tariffs.

Currently, Trump's "Reciprocal Tariff 2.0 is coming in strong" is unlikely to shake the investor community's stock sell-off, as investors have already mastered the "TACO" strategy and are betting that the upcoming earnings season will show an unprecedented AI boom continuing to drive tech stocks higher, thereby pushing the stock market to new highs However, for global risk assets such as the stock market, under the influence of the TACO strategy, the market showed almost no negative pricing reaction to Trump's tariff announcement. This indifferent attitude from the market may encourage the Trump administration to further escalate the trade war, and the market's muted response is becoming a catalyst for the intensification of Trump's trade policies.

The analyst team from Bank of America on Wall Street stated that even if the tariffs are implemented on August 1, due to the existence of "in-transit rules," these new higher tariffs will not be fully reflected in the data until October. Additionally, retailers typically need several months to clear their inventory, and any transmission to inflation may take even longer to manifest. This is also why Wall Street giants like Morgan Stanley are betting that the Federal Reserve will not cut interest rates this year. Morgan Stanley expects that the price increases caused by Trump's tariffs will raise the overall and core PCE price index to 3.0% and 3.2% respectively by 2025.

Bank of America predicts that if the Trump administration formally implements the higher reciprocal tariffs starting on August 1, it will increase the risk of higher and more persistent inflation shocks, with core PCE potentially reaching a peak of 3.5% in 2026.

Against the backdrop of already deteriorating inflation expectations, large-scale cost-push shocks may also trigger more companies to raise prices, with nonlinear effects beginning to emerge, ultimately leading to real stagflation. Federal Reserve Chairman Jerome Powell has repeatedly emphasized that the Fed wants to have a clearer understanding of the impact of changes in Trump's tariff policy before taking the next steps, and several Fed officials, including Powell, have stated that the impact of tariffs on U.S. inflation has yet to fully materialize.

“TACO” Trading Strategy: The Market Bets Trump Will Ultimately Back Down

The increasingly popular trading strategy on Wall Street—TACO (Trump Always Chickens Out): Traders bet that either the U.S. government will retract its tariff threats, or that even if implemented, they will be far less severe than what Trump has threatened and insufficient to significantly drag down U.S. economic expansion.

The term TACO was coined by a columnist from the Financial Times to describe Trump's flip-flopping on tariffs following his "Liberation Day" speech on April 2, but ultimately he would choose to back down, leading to a significant rebound in the stock market. When asked about "TACO" at a press conference, Trump became furious, calling the question "malicious."

The "TACO" strategy has now been widely adopted by traders and is currently the hottest trading strategy. Whenever Trump issues new, more aggressive tariff threats that trigger a market plunge, investors bet that he will ultimately back down or that the actual policies implemented will be significantly weaker than his verbal threats, leading them to choose to buy heavily during appropriate downturns, betting that the stock market will soon experience a substantial rebound.

Based on the "TACO" strategy, even if Trump announces a tariff of up to 50% on the EU and subsequently threatens to raise tariffs on steel, aluminum, and even copper—on which the U.S. has long relied on imports—to 50% this week, the market does not experience significant downward volatility. Instead, it merely undergoes slight fluctuations before starting a new upward momentum under the influence of buying on dips "Investors are actually overconfident in the idea that 'Trump will always make concessions,'" said David Lebovitz, a global multi-asset strategist at JP Morgan. "The market seems to be testing the limits to see how far it can push risk before it starts to crack."

"The market has risen too rapidly," said Christina Hooper, chief market strategist at Manulife Investment Management. She suggested reallocating to markets with more attractive valuations and greater diversification, such as Europe, the UK, and the Chinese stock market. "When stock pricing is nearly perfect, disappointment is more likely to occur."