Trumped! (Is Japan the first domino?)

There has never been any doubt that Donald Trump is a thundering paradox of a man whose mercurial nature and often contradictory policies have given (and continues to give) the global community collective whiplash. Yet, this dichotomous nature allows him to dominate public discourse like no other contemporary figure, and also – perhaps perversely (in some eyes) – yields results. He belongs to the same school of thought as no less an icon than Steve Jobs, though their personal politics could not be any more different. Infamously, Jobs had his own ‘reality distortion field’ by which he envisioned a certain outcome – a product or service – and did not deviate a single iota from that, along the way using force of will, persuasion, logic or whatever other tools and techniques at his disposal to convert others (even vociferous naysayers) to his cause. So too, does Trump: he fixates on a an objective however vague or woolly or simplistic it may seem to others and creates his own counternarrative and browbeats, cajoles, threaten and charm his way to it.

Case in point: the recently announced trade agreement with Japan. It’s a big deal (pun intended), at least for his intended upheaval of the global trading system.

Right off the bat, the U.S. side has been less fixated on the (still vague) trade deal with the U.K. choosing to talk up the chances of a deal with Japan instead. Nonetheless, despite several delegations, many meetings and doubtlessly equally copious phone/zoom calls, the deal had been strangely elusive (likely due to the Trump administration’s chronic chaotic and somewhat freewheeling negotiating process) - until now. In a narrow sense, this is an actual win for this unconventional approach, especially if Japan becomes the proverbial canary in the coal mine which allows the rest of the world to fall into line. Where Mark Carney’s respectful, corporate Oval Office engagement with Trump provided other leaders with a template on how to personally engagement in that aspect of the Trumpian reality show Japan now has the best deal, or rather, the least worst deal, of all the nations with considerable trade surpluses with the US.

The general tariff of 15% to be charged on Japanese goods being imported to the US is higher than the UK's 10%, but the UK actually has no surplus.

The Japanese were reportedly infuriated (or flummoxed) by the Americans’ carnival-style, scattershot approach to the extent where their legendary sangfroid was compromised. Tokyo tried playing hardball, with the finance minister describing its $1.1 trillion holding of US Treasury bonds, the largest in the world, as a "card" that could be put on the table. There were rumours about hedge funds in Japan selling of US bonds following Trump's "Liberation Day" tariffs announcement in April which in turn sparked a wider sell-off, and bigger questions raised over the world's biggest economy and safe haven status of the US dollar.

So, the reaching of a deal matters hugely, in and of itself, and as an example to other major economic blocs, including the European Union (EU). It’s not a coincidence that the deal came on the very day the Japanese hosted EU leaders in Tokyo for, prior to that, there had been scuttlebutt about Japan, the EU and Canada all uniting in coordinating their retaliation. In a single stroke, Trump seems to have divided and conquered, halting any such initiative. It’s quite illustrative of his bare knuckled, ‘divide and conquer’ approach, something quite familiar to anyone successful in the New York real estate milieu.

Inevitably, some EU members of the EU will wonder why a similar deal cannot be struck, at the very moment that Germany and France could have taken retaliatory steps against obvious targets like the US tech giants. Instead, Trump is raising tariffs on some of America’s most important trading partners, and the world is largely cheering the agreements as ‘victories.’ US markets got a healthy bounce higher Wednesday from the trade deal announcement and Japan’s markets took off like a rocket. Even the politically moribund Shigeru Ishiba may have been thrown a lifeline, buying himself more time in the prime minister’s chair after the recent disastrous upper house electoral defeat, portraying the deal as an enormous positive breakthrough.

Donald Trump is not always as unpredictable as the media and his enemies portray, even if he would like to spread that impression himself. He likes unconventional approaches and is not afraid to take wild swings in the hope of securing a home run. Furthermore, his decisions must be seen in the wider strategic context that he is a POTUS into a second term without the need to personally face voters ever again (if one does not count the upcoming 2026 congressional elections). Placing historically high taxes (which is all tariffs essentially are) on imports from around the world — particularly at a time when American consumers are still reeling from the highest inflation they’ve experienced in four decades — marked one of his boldest gambles thus far <think about it: three-and-a-half more years of this to go>. Trump was largely elected on his pledge to fix Americans’ finances and faced a firestorm of doubt from economists who widely shunned his government’s trade policy, which is expected to raise costs for businesses and consumers.

While that may still happen, Trump zagged when everyone was zigging, and — so far — the bet has paid off. He achieved that with some old-fashioned psychology: setting the bar so high for potential tariff pain that anything that has come below that bar appears like a win. Call it what you will – the Madman theory, being crazy like a fox, or just plain reckless in playing a gigantic game of chicken, there is always a plan, though it might not be obvious or coherent. Trump starts from his desired end state, and then just drives relentlessly for it, come what may.

But back to the Japan deal: 15% is more than the 10% that US importers have been paying for Japanese exports since April, when Trump first rolled out his so-called reciprocal tariffs on trading partners — and much more than what the 1.5% tariff on Japanese goods before Trump took office. The world awaits the details here, but it is clear that Japan has protected its agricultural imports, though will import more US rice. It is unclear what can change the lack of popularity of large American cars in the country, though Japanese private companies will be backed to invest half a trillion dollars in the US, in some form.The victory, some analysts say, is the certainty that the trade agreements provide investors, consumers and businesses. And the markets love certainty.

So...?

The trade war is a long game, and far from over, and indeed the long-term implications of Trump’s decisions could yet be damaging — economically and politically. But, in the near term, Trump appears to be winning. Most certainly he’s telling everyone he’s winning.

That tide began to turn on April 9, when Trump paused for 90 days his “Liberation Day” tariffs announced a week earlier that had sent the stock market plunging and briefly entering bear market territory. The bond market had also begun to show signs that it might break — until Treasury Secretary Scott Bessent guided Trump away from his harshest tariff levels. Markets have rallied from that point on, and consumer sentiment — which sank near all-time lows — has rebounded.

Tariffs are now raising significant sums for the US Treasury, without appreciable retaliation against US exporters. At over $100bn so far this year, about 5% of US federal revenue is coming from tariffs, versus 2% more typically. Bessent thinks that the annual tariff take will be $300bn. While this amount is still way off the amount raised by income taxes, it’s still notable and nothing to sneeze at. Moreover, it is being taken without direct retaliation and without right now the market turmoil seen earlier.

Who is actually paying these tariffs? That’s an answer the opposition Democratic party seems incapable of positioning clearly, as their recent fixation with the Epstein files – at best a distraction with no material long termed implications for trump - shows. The key message is that ultimately, US consumers will pay a large part in terms of the prices they pay for imported goods. In the past Bessent and others have suggested that a rising value of the US dollar would help mitigate the cost of imports for consumers. The opposite has happened. The dollar has slumped in the first half of this year, losing 10% of its value against a basket of world currencies. This will add to the cost of imports, in addition to the tariffs.

There is suspicion in the markets that this weaker dollar may actually have been part of the point of these interventions, designed to help boost, for example, American rust-belt manufacturers regain competitiveness. On top of that, the US has also helped its great rival China to at least make a case to the rest of the world, that it can be a more stable trade partner.

Several other events helped soothe fears since the tariff pause: On April 12, the Trump administration excluded smartphones and electronics from the historically high tariffs it had placed on China, leading to another market recovery. In mid-May, the Trump administration reached an agreement with China to lower tariffs dramatically and open some markets that both sides had closed off as tensions rose. Tariffs on Chinese imports fell to 35% from 145%, which had been a historic level that served as an effective shipping embargo. A trade agreement with the UK, a reinforced China agreement and a slew of announcements Tuesday on trade, from Indonesia to the Philippines and then Japan also provided much-needed doses of certainty. There is at least the perception that the logjam might be broken, or is breaking.

Trump has also used tariffs, deals and threats as a way to give US industry a boost. He has been particularly vocal against so-called non-tariff barriers, including digital services taxes, which the administration believes put undue pressure on the American tech industry. Whether diversionary tactic or bargaining chip, the Canadian government’s planned digital tax on online companies acted like a red flag for the president when he loudly threatened the ongoing trade negotiations with setting a new tariff until it was withdrawn. He has also looked towards opening US exports to foreign countries as part of his trade agreements, too, including beef to the United Kingdom, rice and cars to Japan, and various items to Vietnam, Indonesia and the Philippines. And then there are potentially lucrative defense contracts with Japan, arguably the U.S.’s primary security partner in what used to be euphemistically referred to as the Far East as well as longtime ally, the Philippines and Singapore, which has purchased advanced VTOL F-35 fighter jets.

It Ain’t Over…

It would not be prudent for Trump to claim victory on trade just yet, though he most probably will anyways. Barring last minute developments, dozens of trading partners are expected to get higher tariffs set at the end of next week, and Trump has floated raising the 10% universal tariff he imposed on April 2 to 15% or 20%. The EU, another major US trading partner, has found a trade agreement elusive (unsurprising, given their historical inability to unite), and tariffs could surge on both sides of the Atlantic as a result.

So far, the American and global economies have largely been able to withstand Trump’s tariffs over the past several months, but it’s not clear that the current situation is sustainable if those rates go higher — particularly as US importers work through warehoused inventories of goods that were brought in to the United States before tariffs were put in place.

It remains too early to fully understand the longer-term implications, especially with another round of new tariff developments expected in August if countries to not wrap up their negotiations with the U.S. The Trump administration knows this. And the better-than-expected deal with Japan suggests the White House may be reluctant to push important trading partners too hard, recognizing that the economic pain from high tariffs and potential tit-for-tat retaliation could prove unacceptable to businesses, investors and the public.