August 06, 2025

During his third run for the White House, Donald Trump often mused that tariff was the most beautiful word in the English language. He argued that our trading partners were taking advantage of the US , that they were ripping us off, and that a deliberate tariff policy tailored to the individual countries , a bilateral tariff, could reverse and eliminate our trading partners’ trade policies. At a press conference on April 2nd, President Trump unveiled his tariff policy and announced a series of bilateral tariffs rates and on April 9th he unveiled his reciprocal tariffs. While we have criticized the formulation used by the President to determine the preliminary bilateral tariff rates , we have also disagreed with critics of the policy argued that the tariff would be inflationary. So far , to the disappointment of the critics, the inflation rate has not increased as they predicted. After the tariff reciprocity announcement, the dollar declined. A few analysists interpreted the dollar and performance as a negative evaluation of the Trump economic agenda. According to conventional wisdom the dollar decline predicted a US stock market underperformance. But that is not what happened. Why? Using the conventional stock market outcome , the conclusion is that the outcome is consistent with the conclusion that the Trump policies have made the US better off. But what about the decline in the exchange rate? The answer lies in the US monopsony power. If the Trump administration decision to exploit the US has market power. By exploiting its monopsony and monopoly power , the US may be able to improve its wellbeing at the expense of the rest of the world. This would yield a positive correlation between the deteriorating terms of trade and the stock market relative performance. Under this scenario the terms of trade deteriorate , but the exaction of revenues from the rest of the world more than compensates the US for the terms of trade deterioration. However, this means a double whammy for the rest of the world. Lower export prices and less exports mean a lower foreign stock market. The data shows that since the announcement of the reciprocity, the shaded area, with the exception of Japan, the correlation between the two variables switched from a positive correlation to a negative correlation. A result consistent with the monopsony hypothesis previously outlined.

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