The Empire Struck Back. Is Return of the TACO Next?

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At last we can explain why markets have been behaving as though all uncertainty over trade policy and tariffs had been resolved, even though it clearly hadn’t. Mr. Market really believed it was all over. That’s clear from the extraordinary reaction to the latest trade expostulation from President Donald Trump, who will slap 100% tariffs on all Chinese imports next month in response to new restrictions on the flow of rare earths from China.

This is a big deal, which we analyze below, but the market withstood Trumpian threats of 145% tariffs on China six month ago. While there’d been a negotiating pause in trade hostilities, neither power has ever pretended to reach an ongoing, durable solution. This is bad news, but shouldn’t qualify as a major surprise.