In this timely note following the April 2 tariff announcement, Stephen Jen outlines the three key phases of the Trade War now underway: the US “attack,” the global response, and the unknown duration. Together, these stages will shape how markets absorb the shock.
He describes the tariffs as a deliberate negative supply shock—one designed to induce a long-term domestic supply response. While not as disruptive as Covid, the shock is likely to be stagflationary in the short run. Jen also offers a sharp critique of the widespread market consensus from late 2024 that equated tariffs with a stronger dollar, noting that reality has decisively broken with that view.
Importantly, he explains how the formula used by the USTR differs from a “fair trade” framework: it’s built around compressing bilateral trade deficits rather than addressing imbalances in tariff structures. This has resulted in high tariffs on countries like Vietnam, where trade asymmetries are extreme due to structural cost advantages.
In the broader picture, Jen expects global trade barriers to fall over time, not rise. But for now, markets will have to manage through a stagflationary transition—and a Trump administration willing to challenge long-held orthodoxy.
Key Quote
“The shock will be stagflationary for the US and elsewhere… Oh, look at the dollar. The market was 100% wrong in November on the relationship between tariffs and the dollar.”
Table of Contents
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Three phases of the Trade War
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A supply-chain shock
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Eventually, global trade barriers should be lower, not higher
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Fiscal divergences between the US and the RoW
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USTR’s formula on the tariffs
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Bottom line
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