The Merch-Can-‘Til-Lists

By Michael Every of Rabobank

The Merch-Can-‘Til-Lists

Equity markets soared, as did bond yields and the US dollar, while gold and Bitcoin dropped following the US and China taking down their tariffs by 115 percentage points to 30% for the US (on top of legacy 25% Trump 1/Biden tariffs on 2/3rds of Chinese goods and 25% sectoral tariffs) and to 10% for China for 90 days.

Some say President Trump folded, “because markets.” Or “because neo-mercantilism” as there is nothing market-like in China’s dominance of the production and the staggering trade surpluses it runs. Yet there’s certainly dotted lines being drawn on things to show where folds could go.

On the other hand, markets soared despite tariffs that were unthinkable six months ago. Moreover, Trump claimed China has agreed to remove all non-tariff barriers — like massive direct and indirect state subsidies and infrastructure — and underlined that tariffs can go back up again, if not to 145%, if a deal isn’t done by 10 August.

Yet trade partners just saw pushing back at the US can work: why rush to sign a deal like the UK’s —which aims to freeze China out of supply chains— to then see the US say it doesn’t want to decouple from Beijing, or only in key sectors? That suggests the White House is going to have to breathe fire at someone to make their point. The candidate who fits that bill best might be the EU –if Japan, South Korea, or Canada don’t get there first– and now the US will be forcing its prescription drug prices down by executive order, with parties like Europe facing higher prices as a result, there are even more issues to clash over. In short, the trade war isn’t over.

At the meta level, we just published a report on neo-mercantilist ideology, which includes both China and Trumpism. Markets are caught between ‘Merch-can-‘til-Lists’, as China cementing itself into supply chains and de-risking from the West remains its grand macro strategy, and acting against it is the US equivalent. Indeed, markets cheering the victory of a non-market economy over a market-driven one, because the latter was mirroring the former, fail to see what’s happening.

The Financial Times reports US Treasury Secretary Bessent secretly met China’s Finance Minister Lan Fo’an in a basement after the IMF meeting three weeks ago: recall laughter at the US claiming to have made contact with China? Apologise if you were one of them.

Chinese Delegation Spotted Entering Treasury Department, Demands Photos Be Deleted: Report https://t.co/CRh07l2K1Z

— zerohedge (@zerohedge) April 25, 2025

Oren Cass, also in the FT, underlines liberal neo-mercantilists think the US needs tariffs to push back against state-backed champions supported by illiberal neo-mercantilists: “Perhaps the free-traders are betting on the latter, and would abandon American-style capitalism altogether before allowing so blasphemous a word as “protection” to pass their lips. What they cannot have, in the modern world, no matter how ideal in theory, is free trade and a free market at the same time.” Echoing @izakaminska, he says if the US wins this trade war, we might get free and fair trade in places; and if it loses, we won’t get it anywhere. That markets either don’t see this or don’t care, “because cheap stuff/asset prices” is worth thinking about. A lot.

At the macro level China is accelerating efforts to strip foreign firms from its supply chains. US bookings for Chinese cargo just leaped 35% and firms will surge inventory; but all will be looking for alternative supply to ensure there’s no repeat of the recent de facto embargo. Taiwan’s president just proposed a global “non-Red” supply chain ex-China: but has he looked at his own recently?

Our ocean freight bookings from China to US increased 35% in the first day since the trade deal. A big backlog is looming, soon the ships will be sold out.

— Ryan Petersen (@typesfast) May 12, 2025

In short, a 90-day trade ceasefire is likely to restock/rearm and prepare for round 2: just like the Russia-Ukraine version will be.

On which note, Trump says he may join the Russia-Ukraine ceasefire talks to be held Thursday in Istanbul…if he’s wanted there more than he is between India and Pakistan, where both sides have claimed victory in their recent military clashes, but the former has clearly set new rules of engagement and things remain tense.

Trump is in Riyadh today. Rumors are he may meet Syria’s ex-Islamist president, whom the US designates a terrorist, and who’s reportedly offering to build a Trump Tower in Damascus – if tall enough, it might be visible from the outer suburbs where government attacks against ethnic minorities are taking place. What other headline-grabbing moves will be made, with what market impact? One thing is for sure: it will be all about geopolitics, realpolitik, and fossil fuels rather than the ‘Liberal World Order’ (LWO) and all things green.

Nearby, the New York Times explains ‘Why Trump Suddenly Declared Victory Over the Houthi Militia’, claiming the Pentagon spent $1bn in 30 days, lost two F-18A fighter jets and seven $30m drones, almost shot down an F-35, and used so many precision munitions it was worrying contingency planners, with CENTCOM’s metric of success being “bombs dropped.” This is an institutional mindset that assumes infinite supply chains and budget deficit and debt limits as if we were still had vintage LWO QE, negative rates, and either total US integration with the Chinese economy or a totally different US economy. The fact we have none of them –and that the US couldn’t defeat the modern equivalent of the Barbary Pirates, whom the infinitely less powerful early 19th-century US could– should worry markets vastly more than it seems to be doing.     

As another indicator of the shift away from the LWO, the UK Labour Party’s PM Starmer yesterday stated mass immigration has failed economically and politically, with declining GDP per capita, lower productivity, and a greater net strain on state finances, while threatening to make Britain “an island of strangers.” This obviously copies rhetoric from the anti-immigration Reform Party now leading the opinion polls. However, the rules and legislation Starmer is proposing will only slow the pace of British net immigration to a still-high level while infuriating left-wing voters, his own MPs, and UK industries from care homes to universities. Meanwhile, counter-terror police are investigating three potential cases of arson linked to Starmer: at his London home, which is let out; another property linked to him; and on in his old car.

Simultaneously, UK pension funds are to unlock up to £50bn of investments, with half reserved for UK firms, under a new “Mansion House accord” with the government. Expect to see a lot more of this “what is GDP *for*?” state leaning on private capital ahead: as our report on neo-mercantilism shows, it’s as much a part of that ideology as tariffs.

There’s less sign of that in the US budget bill emerging from Congress, however, or at least how to pay for it. So far, it seems to be rejecting higher taxes for the wealthy and removing the carried interest loophole “because lobbyists”, while adding no tax on tips and overtime and social security, plus more defense spending, meaning around $1.5 – 2 trillion on top of US fiscal deficits over the next decade.