🔮 Tariff Fakeout

And What’s Next in the Trade War?

Today’s newsletter was set to run with the headline “Tariff Deniers in Shambles” when Mexico’s president Sheinbaum announced a surprise one-month pause on Trump’s planned 25% tariffs on Mexico following a border security deal.

As of publication, 25% tariffs on Canada (10% on energy) and 10% tariffs on China are still set to go forward.

On Polymarket, the market was betting that Trump was bluffing on the heavy tariffs until just a few days ago. How it played out:

Market Faded Tariff Threats at First

On the evening of his inauguration, Donald Trump previewed his tariff policy while signing his first wave of executive orders:

“We're thinking in terms of 25% on Mexico and Canada, because they're allowing vast numbers of people — Canada's a very bad abuser also — vast numbers of people to come in, and fentanyl to come in."

Trump even mentioned February 1 as the start date. Yet press headlines at the time said Trump was “keeping his powder dry” on tariffs or “punting on a day 1 pledge.”

On January 21, his first full day in office, Trump told reporters the exact same thing: 25% tariffs on Canada and Mexico, and 10% on China, with a February 1 start date.

Yet the market for “Trump to impose 25% tariffs on Canada and Mexico by March” never traded much above 30% for another week. Tariff odds only began to increase on January 29th on little new information.

By 1pm on Friday the 31st, odds were trading in the 60% range when Trump’s press secretary Karoline Leavitt confirmed Trump would be signing the order the next day, which he did, causing the ‘tariffs by March’ market to resolve to “yes.”

Seriously or Literally?

So why - despite Trump having imposed large tariffs in his first term, calling “tariff” the “most beautiful word in the dictionary,” and announcing multiple times exactly what tariffs he was planning did so few Polymarket traders believe him?

A Reuters headline on January 31st reported that tariffs would be implemented on March 1, so it may have been just a timing mismatch.

However there does also seem to be a good deal of denial that Trump would deliver on tariffs. This may have been bolstered by a view that Trump would hesitate to do anything that could hurt asset markets, or that his team would talk him down.

Just after the election, this quote from Scott Bessent made the rounds comparing tariff threats to a loaded gun on the table that is “rarely discharged.”

Counterpunch

Markets reacted fast to the news, with the S&P 500 opening down 1-2% in early trading and Bitcoin getting smacked down to $95k (both recovered somewhat on the Mexico deal news).

Outgoing Canadian PM Justin Trudeau announced a wave of reaction tariffs almost immediately, notably high tariffs targeting liquor manufactured in red states, and a public press appearance urging Canadians to cancel vacations in the US.

Mexican president Claudia Sheinbaum also said that Mexico planned retaliatory tariffs, but was short on details.

Trudeau and Sheinbaum both spoke with Trump on Monday morning, but with vastly different results. Sheinbaum announced that Mexico would be sending 10,000 troops to the border.

But Trudeau’s call earned him a Truth Social blast, although it seems like negotiations will continue today.

What’s Next?

Trump’s tariff negotiations seem engineered to deliver max pain to Polymarket traders.

Someone who bet that Trump’s tariffs were a negotiation tactic would have lost money in the market when Trump signed the order, only to strike a deal 48 hours later.

This also explains why the market may have had trouble digesting Trump’s tariff threats over the first week of his presidency.

How long will this last? The news of the deal with Mexico this morning spiked the “tariffs removed by May” markets to north of 64% for both Canada and Mexico.

Itʻs important to note, however, that Trump’s delay in implementing the tariffs is not sufficient to resolve the market to “yes” according to market rules that were clarified after this morningʻs announcement.

As of now, the trade war is sort of on and sort of off – with everything up for negotiation. We will continue to provide breaking updates on Substack, as well as the “Trade War” tag on Polymarket.com, which has over a dozen markets covering different countries and timeframes.

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Disclaimer

Nothing in The Oracle is financial, investment, legal or any other type of professional advice. Anything provided in any newsletter is for informational purposes only and is not meant to be an endorsement of any type of activity or any particular market or product. Terms of Service on polymarket.com prohibit US persons and persons from certain other jurisdictions from using Polymarket to trade, although data and information is viewable globally.