"Kill a Chicken to Scare the Monkeys"

Trump’s trade strategy might just deliver progress on key geopolitical risks, but will the systemic damage be worth it?

Photo by Robert Hrovat on Unsplash

The money quote of the week comes, as it often does, from Peter Baker of the New York Times, who plucked this metaphor from a conversation about the Trump Administration’s first actual tariffs due to take effect tomorrow. The saying comes from a Chinese folktale about a street performer whose dancing monkey refuses to perform one day. After slaughtering a live chicken in front of the monkey, the performer never has trouble getting him to dance again.

Canada and Mexico are this week’s chickens. But while China is the most obvious monkey (notwithstanding a modest 10% tariff on Chinese imports for now), there are other potential targets in Donald Trump’s effort to make America great again. It’s a strategy that’s literally designed to leave blood on the ground.

Amid the unraveling of the postwar global order, however, this is still a president who likes deals, which means there’s upside opportunity for investors if he delivers even limited agreements that reduce any of the top sources of geopolitical tension. Even so, the question will remain whether his approach delivers more systemic damage than lasting benefits.

Sticking with our vivid metaphor, let’s set aside the fact that the chickens we are now punishing are two of America’s most important trading partners. Let’s also ignore the sham that there are any serious talks underway to negotiate better fentanyl or border controls. Finally, let’s even gloss over the giant hole this blows in the U.S.-Mexico-Canada Agreement that Trump himself endorsed in his first term.

Still, a president who slaughters friendly livestock in his first two weeks just might provoke change that shapes some of what really does impact investor confidence, including all the things going wrong with China, Russia, and the Middle East. There’s surely no straightforward path to resolving the geopolitical struggle with Beijing, restoring stability for Israel and its neighbors, or delivering peace and security to Ukraine. But lopping off a few heads just might make some progress.

We know that Trump relishes a tough negotiation and delights in announcing maximalist demands that are unrealistic, illegal or outrageous. But the point of these tactics seems to be testing just how far out he can anchor a negotiation before the first serious discussions begin. After a few days or weeks, these tariffs may just exact a few concessions from Canada and Mexico on the avocado or softwood lumber trades, but neither Ottawa nor Mexico City are the real targets.

The main negotiation is clearly with China. Washington and Beijing have struggled to agree rules of superpower engagement whether on the future of Taiwan, China’s massive trade surplus, or rising risks in the South China Sea. A burn-the-barn-down tariff strategy, however, might just nudge Chinese leaders to seal a second phase of Trump’s long-ago “Phase One” trade deal, in which China will stimulate its domestic demand and buy more U.S. exports. Tariffs on Chinese steel or pharmaceuticals might remain, but even a limited trade truce would establish welcome clarity to the world’s largest bilateral economic relationship.

Moving on to the Middle East, it's not hard to predict the region will be a source of global instability for decades ahead, but the current shifts in regional power offer the prospect for creative diplomacy. With the fighting stopped in Gaza, is there now a fresh opening for Saudia Arabia to recognize Israel? With Iran’s proxy militias having been roundly defeated and its economy in collapse, could the government agree to a freeze on nuclear weapons development in return for an end to Western sanctions and a pledge to renounce regime change?

Finally, in Ukraine, neither side feels ready to make substantial compromises and it remains fiendishly complicated to find a balance that gives either side a sense of security without the other feeling threatened. And as much as Vladimir Putin may want a cease-fire to give his troops and Russia’s economy some relief, he also knows that Trump may want it even more having made it a persistent campaign promise. But Trump may still be able to drive a resolution that freezes Putin’s current territorial holdings in Ukraine in return for the US lifting sanctions on Russian oil exports.

Each of these deals is fiendishly difficult and even someone as lucky as Donald Trump won’t deliver on all three. Still, if his trade strategy looks chaotic and unpredictable today, his bare-knuckle tactics might just deliver a new trading relationship with China, a calmer Middle East, or global oil markets that benefit again from Russian production.

Investors will track any progress for these potential developments and assess what they may mean temporarily for higher asset prices. The rest of us will be left to wonder if any of it was worth the poultry carnage left behind.