Narrative Shopping

One of the great challenges of financial market commentary is that it is rarely possible to be truly certain about anything - yet it is nearly always commercially necessary to convey certainty. Of course, most financial writers get around this little conundrum by expressing certainty anyway and worrying about whether they have any basis for that certainty later. If at all. It's a taste of the full of passionate intensity thing the man was on about, I suppose. But it doesn't change that certainty in anything relating to markets or the economy is practically impossible.

Except when it comes to tariffs.

Compared to almost any other government policy, tariffs are pretty simple. They are more or less just what they seem to be, and their effects are pretty much what anyone with a working brain would expect. They make other countries mad. They make goods and services purchased abroad more expensive. They increase input costs for domestic producers dependent on foreign goods and materials. They reduce trade and economic activity. They cannot, against our most desperate hopes, be reliably levied against smuggled goods that are manufactured illegally and sold entirely in the black market. As far as first order effects go, there isn't very much wiggle room. The first order effect of tariffs is that they make stuff more expensive and make profitable economic growth more challenging. If there is uncertainty, it concerns whether the direct inflationary effects of tariffs or the deflationary effects of a potential recession win the day. In other words, the uncertain first order effects of tariffs are like the uncertain first order effects of knifing yourself in the gut to find out whether you die from blood loss or sepsis. But that's about it.

Because of this, it's really hard to really do much to steer the narrative of the first order effects of tariffs. Not that people don't give it the old college try.

The second order effects are a much more fertile territory for narrative creation. That's because, as with any other policy, the second order effects of tariffs don't lend themselves to the same kind of certainty as first order effects. They involve people and how they will respond and act. Any argument in favor of tariffs can only live in the world of second order effects. While the threat of tariffs is the usual tool to bring countries to the bargaining table to lower their own barriers to trade, it's certainly possible to use actual tariffs toward those ends. Or maybe you just want some other concession. Sure, you can propose a tariff and then yank it once you've gotten whatever thing you were after, depending on how your counterpart responds. National security and long-term economic health might well warrant stomaching some of those ugly first order effects to facilitate the creation of domestic manufacturing capacities, too. The same goes for public health and critical supply chains, something that became abundantly clear during COVID. There are easy-to-spot negative narratives which relate to second order effects around an uncertain environment for long-term investment and capital allocation, too, but those aren't exactly the kind that someone proposing a massive tariff scheme would usually bring to bear.

Indeed, whether or not any of those is a legitimate argument for instituting a tariff regime - and I submit that it is entirely possible that in some circumstances they might be - you'd be right to expect someone proposing tariffs to try to craft a narrative around one of these arguments.

But a funny thing happens when the real reason for pursuing a policy isn't any of those second order effects or some made-up nonsense about non-existent first order effects, but some secret third thing: the person proposing goes narrative shopping.

What does narrative shopping look like? Well, like this.

Rolling 30-Day Tariff Semantic Signature Density

What you're looking at is the output of a set of what we here call semantic signatures. Semantic signatures are linguistic markers not for sentiment, topics, or keywords, but of a specific meaning being conveyed about something. In this case, that something is tariffs. We've modeled six distinct such signatures and evaluated them against our extensive database of news, blogs, Substacks, research reports, and transcripts. In short, we are looking for the density of the most common tariff narratives in news about global trade. I think the labels of these narratives provided in the chart above are pretty self-explanatory.

When we talk about tariffs in the United States, there is usually an appreciable background level of two stalwart semantic signatures: the narrative that tariffs are about protecting domestic industry, and the narrative that tariffs are about reshoring manufacturing. This is true for at least the last 10 years, pre-dating even the first Trump administration. In the lead-up to and immediate aftermath of that one disastrous Biden debate in June 2024, these remained the principal pro-tariff stories being promoted by the Trump camp.

After a lull in campaign conversations about tariffs that accompanied the Biden-Harris switcheroo, Trump began to tell a new story that he had introduced only sparingly in the past: that tariffs are about the revenue they create and the potential to use that revenue to reduce income tax burdens. It is a sensible enough mix of stories from an electoral perspective. I'm going to help workers, I'm going to make American manufacturing great again, and I'm going to get rid of all your taxes! Tariffs were going to do it all, and that is precisely the mix of narratives that made their way through media and across social media right up until the election.

Almost as soon as the dust cleared from the election in November, however, the administration and its allies in media began actively promoting three other narratives that had been almost completely absent before: (1) that tariffs are about pressuring neighbors to secure their borders and get tougher on drug smuggling, (2) that tariffs are about pressuring other countries to lower their own tariffs, and (3) that tariffs are about getting countries to pay their fair share on global obligations like mutual defense. The last time these framings were around in any size was back in the summer of 2019, when the first Trump administration first suggested using trade to punish Mexico for its lax controls on fentanyl precursors making their way to underground labs and across the US border. But now, with the 2024 election settled, if you felt like administration officials and supporters in media were hopping back and forth between a half dozen different and often contradictory explanations for "why tariffs", your intuition was correct. They were basically throwing everything at the wall and hoping it would stick.

Liberation Day, however, offered us some useful clarity. The table below was published by the White House to detail each of the tariffs that would be implemented. You will see, of course, the header calling these "Reciprocal Tariffs", along with the column of data brazenly labeled "Tariffs Charged to the U.S.A." And by brazenly I mean fraudulently and dishonestly, because the number in that column, the number that determined the new tax that is being authorized under an emergency order to circumvent the constitutional power granted to the US Congress to approve any such scheme, is absolutely not in any way, shape, or form the tariffs charged by each country to the US. A social media user on X named @orthonormalist quickly deduced (and many other researchers confirmed) that the figure is literally just the greater of 10% and each country's trade surplus with the United States divided by US imports based on the Census FT900 trade data from 2024.

The administration wanted very much to frame the story as being about the very reasonable-sounding notion that we should try to pressure other countries to reduce their wildly unreasonable tariffs. Its surrogates in new media were more than happy to take the message and run with it.

Thankfully, the design of the tariff scheme, not the narrative wrapped around it, is what reveals its intent. And any relationship between the tariffs announced by the White House and the size, scale, and unfairness of other countries' tariff regimes is purely incidental. Indeed, there are countries with paltry protectionism regimes getting hit with massive double-digit "reciprocal" tariffs. Neither is there anything structured into these tariffs that would maximize the return of industries necessary to produce a robust American supply chain, or to especially favor industries that are good candidates for reshoring and revitalizing our degraded manufacturing base. There is nothing in its design to maximize the net effect on American households after corresponding income tax reductions and accounting for higher passed-through costs on goods and services. There is nothing in the structure which relates to more secure borders (in fairness, Canada and Mexico tariffs were handled separately), and nothing which relates at all to the idea that countries who have been free-riders on American generosity in spending on things like defense, international institutions, and pharmaceuticals research should pay their fair share.

The very structure of these tariffs is designed solely and specifically to extract the most from the countries who are most dependent on their trade with us.

That's it.

Ben described this impulse succinctly only a few weeks ago.

It’s the pursuit of great power for great power’s sake … good and evil have nothing to do with it. But I absolutely think this is a tragedy, because the pursuit of great power for great power’s sake transforms every American policy, both foreign and domestic, into a protection racket of one form or another.

Hey, that’s a nice country/company/career you’ve got there … be a shame if anything happened to it.

It Was Never Going To Be Me, Ben Hunt (Epsilon Theory)

These are tariffs whose principal effect is to look for relatively distant low income countries with weak purchasing power and no realistic mechanism to ever become buyers of American goods and services in amounts matching what the wealthiest nation in the history of the world can afford to buy from them. It isn't about unfairness or relationships or comparative advantage. It's about "who has the cards" and literally nothing else.

These are the great power for great power's sake tariffs.

Hey, that's a nice low income, emerging export economy you've got there ... be a shame if anything happened to it.

These are tariffs which reflect a belief that global trade is precisely like a real estate deal, where whoever gets themselves more (exports) than they give up (imports) is the winner. You probably know where we come out on that construct, but I'll let you decide for yourself. Whatever you believe about tariff policy, you now have the blueprint for a reliable advance signal for every new protection racket policy about to be introduced in the age of great power for great power's sake:

Just watch for them to go narrative shopping.