TACO and wrestling: how investors perceive Trump's actions

Donald Trump's actions on the international stage, both economically and politically, have earned him the offensive definition of Trump Always Chickens Out (TACO), which can be translated as "Trump always backs down." But now that markets have begun to view his actions through the TACO lens and ignore his threats, he may become more aggressive.

The TACO principle was articulated in early May by Financial Times financial columnist Robert Armstrong. He wrote that Trump first threatens to impose giant duties and then backtracks by postponing or reducing them, especially after markets react negatively. Investors have recognized this pattern and are acting on it. 

By the time Armstrong's column was published, the S&P 500 index had almost completely recovered from the fall triggered by Trump's announcement of "retaliatory" duties on April 2. The market began to recover quickly on April 9, when the president suspended the increased duties on nearly 60 countries for 90 days (though the total duties of 10% remained), and by the end of Q2 went to a new record high.

Trump didn't stand for the July 9 deadline either, and actually moved it to Aug. 1, starting a few days before the deadline to send letters to individual countries with the new fee rates. They mostly appeared the same or a few percentage points lower than those announced on April 2.

"The deadline, which didn't surprise anyone at all, turned out not to be a deadline at all," commented Armstrong. Oh, and the new deadline may not be the last, he noted: Treasury Secretary Scott Bessent, "whose main job is to turn the president's words into action," often mentions Sept. 1 in his talks with other countries. "Like the president himself, the administration's deadlines should be taken seriously, but not literally," Armstrong wrote. - "Seriously" - because if Trump does decide to honor the deadline, the consequences could be enormous. 'Not literally' - because he probably won't."

Market participants, judging by their reactions, think the same way. On July 9, Trump said he would impose 50 percent duties on copper imports and possibly 200 percent on pharmaceuticals. "In response, U.S. stocks had one of their dullest trading days of the year. The S&P 500 closed down 0.07 percent on TACO Tuesday," wrote Bloomberg senior markets editor and columnist John Otters.

South Korea and Japan were among those already warned, but the Kospi index opened 1.4% higher after Trump's letter and the Nikkei 225 was up 0.4%. One explanation for the lack of reaction is that Trump's new threats do little to worsen the situation, Armstrong quotes Paul Ashward of Capital Economics as saying. The new 25% rates for the two countries are the same as Trump's already imposed industry duties on automobiles, which account for 34% of shipments from Japan and South Korea to the US. Meanwhile, auto rates have been repeatedly threatened by the U.S. president to be raised to 50%. And for another major item of their exports, electronics, Trump previously made an exception. 

In addition, these two countries are among the largest trading partners of the United States (including in terms of imports of U.S. products) and important military allies of Washington in Asia. This strengthens their negotiating position, unlike Vietnam, whose imports from the U.S. totaled only $13 billion in 2024 and which agreed to a trade deal: 20% on Vietnamese exports, duty-free U.S. exports, 40% on re-exports (in fact, this is a restriction on Chinese goods shipped through Vietnam).

That said, the Vietnam deal is the only one that looks like an actual agreement; the others announced are framework agreements, points out Charles Schwab's Liz Ann Saunders. Trade agreements typically take a year and a half to conclude and another three years and four to nine months to implement, she notes. 

The agreement with China announced in late June is merely a de-escalation, a truce. No details were given, with U.S. Commerce Secretary Howard Lutnick only stating to Bloomberg that it reinforces the terms of earlier framework trade agreements. The only specifics Lutnick voiced were that "they are going to supply us with rare earth metals" and once they do, "we will roll back our countermeasures."

The situation is similar with the very first of the US "deals" - with the UK. This is a legally non-binding agreement where London, in exchange for lower duties for its automakers and an exemption for aerospace products (in these two areas, British manufacturers are heavily dependent on the US market), agreed to increase purchases of beef, ethanol and industrial products.

Stock and bond markets seem to be of the opinion that moderate duties (10% for all countries plus some for the particularly intransigent and for a few select sectors) will not have much impact on economic growth and corporate profits. Such appeasement began to worry some analysts. "Given that the market has performed so well since April 9, and the effect of the duties has yet to fully show up in the economic and inflation data... will this cause the [Trump] administration to step up the pressure on duties?", Saunders wondered.

It seems Trump really felt the market was no longer resisting him. On Thursday, July 10, he released a letter to Canada saying it will face a 35% levy starting August 1. An administration official, though, said to the FT that goods that comply with the free trade agreement Trump struck with Canada and Mexico in 2020 would "probably" not be subject to it. And that significantly reduces the potential damage. But the president himself, who also threatened countries that did not receive a letter from him with rate hikes of up to 15-20%, said there was no negative market reaction, "I think the duties have been very well received. The stock market made a new high today." On Saturday, July 12, Trump threatened to impose 30 percent duties on goods from the EU and Mexico starting August 1. On Monday morning, futures on the S&P 500 and European stocks were down 0.6 percent. Asian markets were little changed. The dollar index (its exchange rate against six major world currencies) was adding 0.15%. 

Trump's postponement of the duties in April was forced by a drop in markets, most notably Treasuries. What might now affect his policy? Apparently, serious problems in the economy. Because the duties had no clear economic consequences, markets soared to new highs on TACO trading after Trump's April reversal, writes Bob Elliott, CEO of Unlimited Funds, on his blog. "But without a painful reaction from the markets or the economy, the administration is getting more aggressive," he warns.

Victor Schwetz of Macquarie provides a comparison with professional wrestling (of which Trump is a fan): the seemingly brutal fights are pure spectacle, with the finale often predetermined in advance. "It's entertainment, not a sporting competition or war. This example describes the ongoing chaos as best as possible: not conventional negotiations (legally binding long-term agreements on the basis of which business can be planned), but what might be called a vague temporary truce. The chaos is likely to continue until there is evidence of damage to the U.S. economy."

If the U.S. does impose the duties on Aug. 1, the level Trump outlined in the letters, their overall level would rise to the highest since the 1930s, when the protectionist Smoot-Hawley Act, which exacerbated the Great Depression, was passed. At the same time, the rates announced on April 2, if implemented, would raise duties to the highest level since the late 19th century. 

Even wrestlers, despite the staged nature of the fights, sometimes suffer serious injuries, warns Oeters: "It's impossible to eliminate all the risks of huge men throwing each other across the ring. Similar arguments apply to tolls. [So far] a lot of market behavior has been driven by the notion that the U.S. can set trade policy back a century without breaking anything."

The TACO principle works in US presidential foreign policy as well. Jeremy Shapiro, director of the U.S. program at the European Council on Foreign Relations, showed that during his first term and the beginning of his second, Trump threatened to use force in international affairs 22 times, but actually did so only twice (two more times U.S. allies launched airstrikes after his threats against Syria and Russia, which helped it). 

Already since its publication, Trump has joined Israel in its war against Iran - the US bombed three Iranian nuclear facilities, ordering the bombing of Iranian nuclear facilities, a strike he actually threatened. 

But in the case of Russia, for example, which continues to launch strikes in Ukraine, Trump stated as early as May 28 that in about two weeks, the White House would realize whether Russian President Vladimir Putin was playing them or not, and if so, would react "a little differently." 

It wasn't until July 13 that Trump announced that the U.S. would send Patriot systems to Ukraine. And Axios, citing two knowledgeable sources, reported that on Monday, July 14, he would announce a new plan to arm Ukraine, which would include offensive weapons.

Although commentators often call Trump unpredictable, his statements and actions add up to a certain picture, Shapiro points out: "Trump largely uses threats and force like a playground bully: big and outwardly strong, he is actually afraid to use force in any situation that even vaguely resembles a fair fight. In the bully, threats serve more as intimidation than as a prelude to violence. Real violence is used only against much weaker opponents who have no hope of striking back."

Some of Trump's recent actions fit into that assessment. He announced plans to impose 50 percent duties on BRICS member Brazil, triggering a 3 percent drop in the real's value against the dollar and a slump in the stock market, where shares of airplane maker Embraer fell 9 percent;

At the same time, the US already has a trade surplus with the country, notes Bloomberg: given this, it is unclear what Brazil can offer Washington even if it starts negotiations with it. Furthermore, Trump's rationale was not economic reasons at all, but pointed to the lawsuit against former President Jair Bolsonaro and Brazilian authorities' restrictions on content on social networks of US companies such as Facebook.

Current President Luiz Inácio Lula da Silva wrote in X that Brazil would not allow itself to be "taught" by anyone and promised his own "retaliatory" measures. 

But the U.S. remains its second-largest trading partner after China, so steel products, transportation equipment (mainly aircraft and parts), specialized equipment such as civil engineering, and the minerals industry could be hit hard because they are largely focused on the U.S. market, noted Felipe Arslan, CEO of Morada Capital.

This article was AI-translated and verified by a human editor