How to interpret Trump's tariff stick this year?

Trump once again wields the tariff stick, and global capital seem to have entered a risk-off mode, including the Chinese assets that were being reassessed, which have also entered a correction mode. Here, Dolphin Research takes the opportunity to discuss the policy logic of Trump’s administration.

If you pay attention to the media interviews of U.S. Treasury Secretary Bessent during this period, Trump's fiscal policies are quite understandable:

1. Core belief: The allocation efficiency of the private sector is higher than that of the government sector.

2. Policy objectives: Reduce national debt (the core is interest payment costs), lower inflation, and bring manufacturing back.

Specific implementation methods:

a. Core measures to anchor inflation: BABY, BUMP!

The Trump administration believes that there is no need to control oil prices by reducing supply, as only oil-producing countries like the Middle East and Russia ultimately benefit.

U.S. inflation is closely related to oil prices, so the U.S. needs to increase oil production.

However, the capital expenditures of oil companies are long-term decisions; if the policy strongly encourages green energy and aggressively implements new energy vehicle alternatives, oil companies will be reluctant to expand production capacity. Therefore, Trump’s reduction of new energy vehicle subsidies aligns with this policy thinking.

b. Managing the deficit: Shift spending/investment from government-driven to private sector-driven.

The Trump administration believes that private capital allocation will far exceed government allocation efficiency, advocating for a smaller government and empowering enterprises.

In practice, this means using DOGE to address the inefficiencies of government departments (while also achieving a consensus from extreme polarization to a unified stance), so-called reducing government and decentralizing power, tightening the belt.

The U.S. fiscal deficit is not an income issue but a spending issue. Every area of spending appears too rigid (social security and other transfer payments are overly exaggerated), and the amount that can be cut is very limited.

On the revenue side, the key is to reduce taxes on residents and businesses, allowing them to decide on capital allocation themselves, effectively returning the power of capital allocation to the private sector and improving allocation efficiency.

Moreover, only when the efficiency of economic capital allocation improves can the economy achieve normal endogenous growth rather than inflationary growth.

c. Reviving the heart: Bringing manufacturing back

In Dolphin Research's view, this may be a strategic-level issue, building long-term national strength and creating hexagonal warriors.

Let’s make a hypothesis: if the future of the world is "embodied intelligence," and 80% of the global embodied intelligence manufacturing is supplied by China, this is not the outcome the U.S. desires. However, the entire industrial chain of intelligent robot manufacturing is indeed domestic.

Of course, from the perspective of service economic growth, bringing manufacturing back can also drive organic growth in the domestic economy.

The Biden administration's approach to bringing manufacturing back almost replicates domestic industrial subsidy policies—aka, the Inflation Reduction Act. The result is various industry-guided low-interest loans (think Rivian), selling cars to get government subsidies, and so on.

But under the small government philosophy, Trump’s approach is: “duty is the most beautiful thing.” Through various punitive tariffs, the essence is to reduce the price difference between domestic products and imported products.

Of course, in practice, not all manufacturing is returning; low-end manufacturing is diversifying, such as moving to Southeast Asia and Mexico, while high-end manufacturing genuinely wants to return. However, it is not an easy task for the manufacturing industry, which has been hollowed out for 60-70 years, to return.

But it is important to note that a tariff-style (isolationist) return of manufacturing may very well be a double-edged sword, because it essentially does not improve the international competitiveness of in-house productions, especially when the price-performance ratio of self-manufactured products compared to overseas manufactured products has a huge gap, requiring very high tax rates to make up for this price difference, which in turn brings domestic inflationary pains.

The elephant in the room: What to do about national debt?

Among the above three measures, the main ones that reduce debt pressure are the first two. It is very difficult to reduce the debt balance itself; the core of national debt management is:

a. Lowering interest payment amounts. The interest payment amount depends on the cost of interest rates; for debt related to economic construction, in the long term, it should still be mainly long-term debt; therefore, the core of lowering interest costs is to compress the yields on long-term debt.

If long-term expectations cannot be managed, even if Powell lowers interest rates, and short-term rates decline, the yields on long-term debt will still rise (this was already previewed before Trump took office, where short-term rates entered a rate-cutting channel, but long-term yields reached new highs).

b. Increasing endogenous economic growth and lowering the economic debt leverage ratio. This is likely to be very perceptible in the domestic economy over the past two years. The two factors for lowering the leverage ratio are: reducing the numerator: lowering the absolute value of debt, and raising the denominator: GDP. Raising the denominator feels much better.

Therefore, Trump's first measure—intensifying oil extraction to reduce short-term inflation; the second measure—reallocating economic spending back to private forces, is to suppress long-term yield expectations. Ultimately, the return of manufacturing will enhance long-term comprehensive competitiveness.

It seems that the idea is good, but the operation is very difficult.

At the same time, regarding tariffs, one should not expect any luck: if Trump's tariff war during his first term was particularly aimed at China, targeting the number one competitor, this time it is essentially a means for high-end manufacturing to return. Any factors that affect the return of high-end manufacturing will be subject to increased tariffs.

Therefore, this time, manufacturing powerhouses and major countries may all be targeted. There is no need to harbor any lucky thoughts; anyway, we will respond to whatever comes our way.