The Wrong Metric

Markets up, tariffs down... you're still looking at the wrong number

The markets rallied across the board after Scott Bessent and his counterpart, He Lifleng, emerged from the Swiss ambassador’s swank UN residence on Lake Geneva with news of a cease-fire in a trade war. The US is dropping tariffs on Chinese goods from 145% to 30% (effectively the ten percent on the world plus the 20% imposed earlier) and China dropped tariff’s from 125% to 10%. Stocks and bond yields are happy. With the UK tariffs effectively 8% with exceptions - which puts Scotch again at bonny levels. Lets’s have a drink.

Although, it’s possible that the most crucial metric isn’t absolute tariffs or market gains, but the length of the ceasefire: 90 days. According to Bessent, that 34% level announced on Liberation Day isn’t a dead letter, its the default if some formal deal isn’t reached. The details of major trade deals last take longer than that and given Trump’s managerial style, a hyper-aggressive move can’t be ruled out. What is certain is that Beijing will counter the default 34% with its own. The entire process might be crazy enough to work, but it also bakes a great deal of uncertainty into a system that runs best with predicable rules. There are decent arguments for and against tariffs, but you can’t really do business without knowing what those costs are.

Companies can’t stay on pause forever, so they will have to find ways to hedge against whatever fresh hell is coming 90 days out. You don’t have to know what will happen, just how to hedge against it going completely sideways. But it is going to cost. After a spectacular run of market returns, corporate hedging is going to weigh on profits. Hedging is, by design, inefficient, even if it makes a system or company more robust. The cost-benefit analysis on your insurance premiums are terrible, until they aren’t.

Another Oval Office “I can’t hear you say Thank you” moment can’t be ruled out. Beijing and Washington are desperate to claim the win and show the world that the other guy blinked, so the political risks for both there. So, the best case scenario for the 90-day cease-fire is a fairly unclimatic nothing that that goes on indefinitely without fanfare or a lot of noise. It’s more or less worked for Korea and is plausible for the same reason: both sides are accusing each other of acting out of desperation - both side feeling an uncomfortable pinch in the economic shorts.

A trade ceasefire may be suboptimal, but a rules-based in global trade order is a fairly novel concept. Humans really don’t like uncertainly for the obvious reasons, but we have evolved to be very good at hedging our bets.

---