U.S. secondary sanctions against countries importing Russian oil and gas aim to cut off revenue to the Russian war effort by imposing tariffs on imports from nations like China and India, with the economic impact increasing non-linearly (squared) rather than proportionally, potentially causing significant domestic economic disruption in both the U.S. and target countries while having uncertain effectiveness in ending the war.
US Secondary Sanctions on Russian Oil: Impacts
Added:Understanding the distinction between primary sanctions (restricting domestic entities) and secondary sanctions (targeting third-party foreign entities).
Basic mechanics of the global oil market, including pricing benchmarks (Brent and WTI) and the roles of major producers like OPEC+ and consumers like China and India.
The geopolitical context of the Russia-Ukraine conflict and the initial economic sanctions imposed by the US and its allies post-2022.
The role of the US dollar as the world's dominant reserve currency and how this dominance enables US extraterritorial jurisdiction.
Analyzing 'shadow fleets' and the tactics used by sanctioned states to evade oil price caps and maritime trade restrictions.
Studying the acceleration of de-dollarization and the rise of alternative international payment systems (such as China's CIPS or Russia's SPFS).
Evaluating the long-term shifts in global energy supply chains and the geopolitical realignment between Russia, China, and India.
Examining the compliance challenges and legal risks faced by multinational corporations and financial institutions operating under shifting sanctions frameworks.
214.7K views8.7Klikes47:41Original Release: 2025-08-05
Donald Trump is on the verge of making the highest leverage decision of his term, but we are hearing very little about the consequences.
Blame it on the parable of the president who cried tariffs.
However, this situation is different. So, we need to talk about it.
What I am referring to, of course, is the secondary sanctions package that Trump originally announced simultaneously with the deal to sell weapons to NATO countries to ultimately increase arms transfers to Ukraine.
The ramifications of secondary sanctions could be huge, ranging from bankrupting Russia to plunging the entire world into a recession. That is why we need to take a deep dive into the subject.
At least at the start, the United States was not rushing into it. Trump’s sanctions threat originally came with a fifty-day deadline.
And while real action was happening with the weapons deals, with some of those weapons already in Ukraine and making a difference, the sanctions package left people to wonder whether it was serious, just a bluff, or yet another deadline that will come and go without anything happening, meant to distract the public from other news stories.
Understandably, critics immediately pointed to option number three.
In addition to wanting to guide media coverage in a certain direction, Trump has wanted to stall real action on Russia, because anything there would be costly, and his staff within the Pentagon really, really want to shift the focus to the Indo Pacific.
However, less than three weeks later and without any prompting, Trump cut the deadline to between ten and twelve days from that point.
That is inconsistent with wanting to stall things out, leaving us with just two options remaining.
Well, it is a verbal threat that the leader would want his opponent to comply with regardless of his intention to follow through, so cue the standard caveat.
But we are not talking about some nebulous trade policy here.
This is a major national security issue, with connections to national security priorities that we know run deep in the Trump administration.
The strategy also has the backing of almost the entire Senate, Democrats and Republicans alike.
And the saying is not “listen to whatever the opposite of what a leader says.” As such, it is up to us to look at other cues to try to understand Trump’s true intentions here.
Indeed, we need to conduct a thorough investigation to understand what exactly is happening and whether Trump will follow through.
So, today, we will begin by discussing what exactly is in the proposal.
Then we will look at how each of the major actors will respond along the various stages of the sanctions process.
For Russia, this is a question of the extent of the economic damage to the country and whether it will actually lead to an end to the war.
Then we will turn to China and India, the main countries that will pay the direct price of the sanctions.
The focus there will be on the bigger strategic picture, how tariffs actually work (because goodness the nuance there has gotten lost), what the domestic political effects will be on those countries, and what might happen if they continue to buy Russian energy exports instead.
Finally, we get to the big discussions involving the United States, like whether Trump will follow through, an economic rationale for the sanctions that is common in otherwise normal trade policy, and what the domestic economic consequences if the targets fail to yield will be.
I mentioned a moment ago that Trump’s announcement of the shortened deadline as well as the secondary sanctions themselves have not gotten the attention they really ought to.
Well, let me show you a bizarre duality in the news coverage on the topic.
There was indeed a ton of reporting on the subject.
And it also had consistent coverage across the ideological spectrum.
But with so many other things going on in the news, that headline quickly got brushed aside. Blink, and you missed it.
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Let’s begin by discussing what the new sanctions plan will actually do.
If you want the raw details about the bill itself, I can point you to this deep dive that I did over on the secondary channel a couple of months ago.
Wait. A couple of months ago? Yes, a couple of months ago.
You can already understand why there is skepticism that this time it might be different.
But beyond my “these sanctions do not directly target Russia!” rant, which, don’t worry, I will get to later, let’s spend a moment talking about the sanctions regime more broadly.
Obviously, the big goal of sanctions is to make Moscow miserable, both from a pure financial perspective but also as a means to reduce arms flows and military recruitment.
That gives Ukraine more leverage to either win the war or negotiate a more favorable end point.
The problem with sanctions is that you are taking what is otherwise a profitable economic relationship and telling everyone that they cannot do engage in it anymore.
But that means that money is being left on the table, and so enterprising individuals will look for a way to go around the rules.
As an analogy, think about any product that is illegal in a domestic setting.
There is probably a black market for the good.
As long as there is sufficient demand for a good, the supply will find a way.
You end up getting cat and mouse games between the black market and law enforcement.
Well, it is the same idea with large-scale sanctions, now three years running into this invasion.
Indeed, whenever you hear news of further sanctions legislation against Russia, usually these are just ways to shore up the loopholes that those enterprising individuals have discovered.
There is very little that Russia still exports to the West, and to the United States especially, meaning that there is little left to sanction.
The bulk of what remains untouched is fertilizer, an exemption dating back to Biden and in place to avoid global food insecurity.
It is worth noting that this disproportionately benefits the developing world. If food prices go up, it is not the well-off countries that go hungry.
Oil and gas to Europe remain the other significant exceptions, but we will loop back to those in a second.
The point is, most “new” sanctions are equivalent to running on a treadmill: you have to keep moving if you want to stay in the same place.
But this right here is not your average sanctions bill.
And now weeks after Trump made a very public announcement regarding it, I still see way too many comments online that: one, it sanctions Russia, two, that the United States barely has any trade with Russia, and three, it is therefore meaningless.
Wrong! Sorry, I have to rant about this again.
But please forcefully correct anyone who is still missing the mark on this point.
This is a secondary sanctions bill, meaning it places sanctions on countries importing Russian goods.
If you cannot punish the perpetrator any more than you have already, punish those aiding and abetting the perpetrator. For the most part, this means sanctioning *India* and China for importing Russian energy.
Turkiye and Brazil would come next on that hierarchy.
The Senate bill calls for 500% tariffs, while the number that Trump keeps using is “only” 100%.
There are carve outs. Some European countries buy Russian energy and also donate aid to Ukraine. As thinking goes, their import policies are problematic, but not as problematic.
Much of the online pushback from the main targets points European hypocrisy here.
Keep in mind that there is a reason why Ukraine is not as frustrated with Italy as it is with, say, China, and that is what is accounting for the difference.
Turkiye is the hardest case there, as a member of NATO but also a large importer of Russian energy exports.
Now, as a matter of strategy, there are three phases to how such sanctions would unfold.
First, the United States has to decide whether to impose the secondary sanctions or not.
Second, if the United States imposed the sanctions, the affected countries must choose whether to comply with the regime or continue trading with Russia as normal.
Finally, if the affected countries comply, Russia must decide its next steps for the war, which also brings in a bunch of other parties.
It might be tempting to go through each of these points in sequence, but that is actually a bad way to do it.
Rather—and this is a big life lesson that will improve your strategic thinking aside from today’s topic—we should work backward.
The reason is that what happens in the final phase determines whether China will comply or not. So we need to understand the implications of the end to inform China’s previous decision.
Same with a country like India.
Likewise, the United States needs to understand the implications of China’s decision to make a good first move.
Thus, we will start at the end and work our way backward.
Okay. Let’s imagine that the secondary sanctions shut off the oil trade. What happens next?
Well, even if we are restricting attention to the big players like China and India, it is a disaster.
Russia exports about 3.22 million barrels of oil per day right now. It is simply infeasible for the rest of the world’s gray market to absorb that many excess barrels.
The situation is even worse for natural gas. That tends to be pumped out via pipeline, and you cannot reroute a pipeline to another country like you can an oil tanker.
To replace the pipeline, you would need to develop liquid natural gas terminals.
Russia has some LNG capacity already, but you cannot just substitute pipes for more LNG in any meaningful timeframe.
In terms of raw numbers, about a third of Russia’s federal budget comes from oil and gas receipts.
That does not mean that all of the money will disappear overnight. Don’t forget that there are also consumers in Russia, and some of them will begin to purchase more domestic oil.
Never mind some small foreign countries.
Trying to pin down an exact number here is a bit of a fool’s errand, because we cannot trust Russia’s budget figures.
During a war, it is sensitive strategic information. The Kremlin does not want to give it away and make life that much easier for the West.
But whatever the budget may come out to, the direct effect of lost energy revenue will not be a number that the Kremlin can just sweep under the rug.
The Russian Central Bank must also worry about spillover effects. Entering the war, Russia had “Dutch disease,” an economic phenomenon where strength in a commodity export damaged its domestic manufacturing industry.
The initial sanctions on Russian energy exports created a vulnerability there.
The Russian economy survived, though, because the war machine spiked demand in industrial output.
However, the further choking energy exports will put even greater strain on the system.
It is unclear whether yet further military production can solve the problem, especially when the government’s ability to finance those outputs is also under attack.
That is liable to cause the first of many domino effects we will encounter today, where the rest of the Russian economy falls apart without one of its pillars to stand on.
The simplest solution for the Kremlin is to dip harder into its “Fortress Russia” savings that it had accumulated before the war.
That is a finite resource, though, so it does not truly solve the problem. It just delays the consequences.
Now, how long it will delay the consequences is again a bit of a mystery. The cash remaining in Fortress Russia accounts is sensitive strategic information in the time of war, just like those budget figures.
Still, the takeaway point here is that it will have a tangible effect, and arguably more than any other feasible policy could. Russia needs to pay for its metal, and it needs to pay increasingly high premiums to entice the next month of recruits to sign up and deploy to Ukraine.
As a result, the Kremlin will have to choose between exerting less military pressure on Kyiv and increasing its own risk of instability and revolution at home.
In sum, line moves east.
Of course, “line moves east” is not the point of the United States imposing the secondary sanctions. The Trump Administration wants an end to the war.
Unfortunately for the president, though, attacking crude oil is a crude way to accomplish this goal. It will make Ukraine a little more optimistic about its expected outcome of the war, and Russia a little less optimistic.
That does not immediately result in a convergence in expectations, and convergence is what you need for the war to end.
The Kremlin still thinks that it can outlast the West and obtain a much better battlefield outcome by continuing to fight. Perhaps implementing the secondary sanctions may move that belief—sort of a wake up call in the Kremlin about how much Trump can be manipulated—but you can understand why bettors might not be rushing to place such peace bets.
Still, there are a couple of points for optimism about why this pushes the conflict in the right direction, even if the effects will not be immediate.
First, Russia needs to keep pushing new men to the front to maintain the initiative.
One of the main bargaining frictions driving the war currently is an incongruence between the line of control and Russia’s expected outcome of the war.
A reduced ability to keep pursuing the current offensive starts to align those two, and so we are making progress there.
If you want more details about this issue, check out this video from last week. I do not want to repeat all of its points here.
Second, following Special Envoy to Ukraine Keith Kellogg’s peace proposal, the sanctions only stay as long as Ukraine is willing to pursue a ceasefire.
So, yes, in the aggregate, the sanctions ought to make Ukraine more optimistic. But the United States can effectively suppress that optimism by reminding Kyiv that trying to exploit it will result in the sanctions being lifted and bad battlefield outcomes.
And I think we all have it engrained in our heads what it looks like when Ukraine and the United States are not on the same page regarding ceasefires and settlements.
Now let’s go a step back in the sequence and examine whether China and India will comply with the sanctions regime. The central lessons from the previous section are that, one, this will likely be a long-term policy, and, two, the effect will not be good for Russia.
Point one makes breaking the regime look unattractive, because the pain will correspondingly last a long time.
Meanwhile, point two is effectively irrelevant for India. The country has tried to stay neutral on just about everything from day one of its independence.
What is more interesting here is that Trump enacting the policy effectively forces India to pick a side, but we will get to that choice in a moment.
For China, it may be tempting to think that Xi is concerned about Russia’s battlefield outcomes. “Limitless friendship” and all of that.
I think the joy visible on both of their faces tells you what you need to know about that, though.
Beijing and Moscow are not aligned by a common goal. Rather, they have a marriage of convenience, united by their desire to disrupt the Western world order.
To be clear, Russia is not about to start fighting China. This is not one of those geopolitics fanfic videos that tend to get a lot of views but are utterly devoid of reality.
It is just that how much land Russia captures in Ukraine is effectively irrelevant to China.
The real question that matters to Xi is how much the West’s ability to defend Taiwan has declined.
Well, that and how much money China can make in the process, whether it is from buying cheap Russian oil or exporting dual use goods that Russia can eventually fashion into weapons.
As a result, this ultimately boils down to an economic question for both parties.
And so to the trade data we go.
India exports about $88 billion in goods to the United States annually.
The home of the brave is indeed India’s largest trading partner.
For China, it is $525 billion annually.
Again, the largest bilateral trading partner for Beijing.
Now would be a good time to dive into the economic consequences of a 100% tariff on those goods— because, like I said at the top, the nuance of tariff policy has been lost in the political discourse over the last decade.
Three points about this: who pays for the tariff, how much the tariffs actually charge, and how much damage they will cause.
First, the Trump Administration often touts tariffs as being a great source of revenue and a way to make other countries essentially transfer money to the United States.
That is wrong. To state the obvious, when prices increase on the end goods sold, the increased price is attributable to the tariff.
That extra amount effectively ends up in the government’s coffers, meaning that that U.S. consumers have now paid a tax.
Now, the money might not literally be handed directly to the government. But a tax with extra steps is still a tax.
This has led to a separate belief that the only thing tariffs do is raise prices for Americans. That is also not true.
It is literally Econ 101 that the burden of a tax is split between the producer and consumer.
Who bears more of it depends on how “elastic” the supply and demand curves are.
Rather than burden you with second derivatives, this is essentially a question of how sensitive consumers are to price increases versus how sensitive suppliers are to production cost increases.
For a classic example, consumers of life-saving medicine are not sensitive to price increases.
They either buy or die. So if the price increases, very little demand falls off.
In turn, if you levy a tax on the drug, almost all of it will be paid by the consumer.
Trying to track the entirety of elasticities of Chinese or Indian exports would be a fool’s errand given how a blanket tariff covers all of the various types of products coming in.
I will say this, though: there are a ton of other countries that would want to fill the void of lost manufacturing exports to the United States.
In fact, a decent amount of manufacturing has shifted to Vietnam in recent years, anticipating deepening trade wars between the United States and China, and specifically Trump and China.
Meanwhile, there are not very many other countries looking to purchase what otherwise goes to the United States.
And those that might are almost universally aligned with the ultimate goal of ending Russia’s invasion.
Taken together, that would all suggest that a large chunk of the tax burden of products still exported will be paid by Chinese companies— though I will get to a countervailing incentive in a moment.
For now, the key phrase there is “products still exported.” How much trade will still happen is a question for the next two points.
Regarding the second point, there is a perception that a 100% tariff means that prices of Chinese or Indian goods would double. That is not the case.
A full analysis how tariffs actually get applied is a subject best left for a trade lawyer, and goodness knows they make good money knowing how to manipulate the system.
But let me give you a couple of examples using everyone’s favorite book: How Ukraine Survived. It retails for $17.
Let’s suppose that a wholesaler wants to bring in a box of them, imported from China. In practice, they are not printed there. This is just a thought exercise.
It is tempting to think that a 100% tariff would be based on the $17 retail price, and thus the tax collected would be $17 as well. That would then raise the retail price to $34.
Well, we already know from our discussion of price elasticities that the seller, in this case China, will eat some of the tariff.
So we can already trim the retail price.
But aside from that, the tariff is not based on the retail price. It is based on the wholesale price.
The reason that the retail price is $17 is that the retailer needs to cover its costs of operating a storefront, hiring employees to handle order fulfillment, the price of the end-consumer shipping, and so forth.
For something like a book, the cost of the intellectual property development was done in the United States, and that is also built into the retail price.
It would not make sense levy a tariff on those other things, and so that is not what happens in practice.
If the wholesaler charges $4 a book to print, then $4 is the basis of the tariff.
It is possible that the end consumer price only goes up to, say, $18 or $19.
It is also possible that the printer has very tight profit margins, and so the product does not get sold at all because of that $4 tax.
The Chinese electronics manufacturing industry, for example, tends to run along a razor’s edge, so that is liable to disappear overnight.
The point is that a 100% tariff might seem like literally all trade from those countries to the United States will grind to a halt, but that is not true. A lot will. Much will not.
Now, that may have made a 100% tariff sound like no big deal, but I assure you that it too will be a disaster.
That is because of the third point: welfare losses tend to increase in the square of a tax, not linearly.
For example, suppose that China exports a good at $10, and there is a 10% tariff placed on it. Then $1 is paid.
Again, that will squeeze some portion of suppliers out of the market because profit margins are too tight, and it will squeeze some buyers out of the market because they were just barely willing to purchase before the tax.
That lost production and consumption is known as “deadweight loss.” The tax vanishes value into thin air.
Companies are not profiting, consumers are not enjoying their purchases, and the government cannot even collect a tax because no transaction took place.
Measuring the exact deadweight loss again depends on specific supply and demand curves. But let’s just call the total deadweight loss for a $1 tariff the variable DW.
Now suppose you raised the tariff to $10, or 100% of the price. You might note that the new tariff is ten times larger than the old one. Therefore, the deadweight loss will proportionally increase to 10 DW units.
Obviously, ten times the economic loss is concerning, and so maybe you are still somewhat weary of the tax.
Well, that conclusion wrong. Remember, deadweight loss increases in the square of the tax.
So this $10 tariff actually increases the deadweight loss to 10 times 10 of the original value, or 100 deadweight loss units.
Yes, a 100% tariff is one hundred times worse than a 10% tariff.
The basic idea is that taxes manipulate both supply and demand simultaneously.
Those operate on two separate dimensions. Consequently, rather than increase linearly, the loss gets squared.
So, no, transpacific trade would not grind to a complete halt.
But there will be massive hits to those $88 billion and $525 billion in annual trade flows.
Now, is that worth forgoing the 2.4 million barrels of oil coming into China every day, or the 1.9 million barrels going into India if you are those countries?
I do not know. It certainly is not the type of thing that either of their governments would want to have to figure out. But I can tell you that they are already trying to figure that out.
One thing worth noting here is that part of the demand for oil in each of those countries is to produce goods that are ultimately exported to the United States.
Thus, by removing trade from the equation, you actually cut demand anyway. It starts looking more attractive to acquiesce to the U.S. policy.
Another question that is not receiving enough attention is whether Europe will be joining the secondary sanctions regime. India, for example, imports a lot of Russian crude to turn around and sell back to Europe, thereby profiting on the price spread.
I am mostly leaving that question out of the video because it is likely a large enough topic that it warrants an entirely separate conversation.
But if Europe is also sanctioning India, it makes the decision that much easier because India loses out on much of the value of buying Russian oil in the first place.
For now, I will say this: Ukraine is more of a Europe problem than a United States problem, and I find it curious how Europe’s participation in this sanctions regime has received very little coverage so far.
To be clear, I am not saying that Europe does not care. But there is an odd media disconnect where it is front and center for the Trump administration but seemingly on the media’s backburner for Europe.
Okay, that was the big picture outlook on trade. I now want to zoom in on the domestic political consequences of curtailing trade with the United States on that level.
Although India’s ratio of oil dependency to U.S. trade is higher than China’s, I will mostly focus on China here, partly because China is more politically aligned with Russia, partly because China also consumes a huge amount of Russian natural gas, partly because of autocratic regime dynamics, and partly because India may have already answered this question for us.
Actually, this is a subplot of its own. Reuters reported that state-owned oil companies stopped importing Russian oil.
But then the government came out and insisted that it would keep buying Russian oil.
In the aftermath, Reuters stuck with its original report, and further claimed that India was pivoting to other suppliers.
I cannot adjudicate what is actually happening here.
Maybe this is a leak that represents India’s true position, and this is the Indian government trying to posture in the middle of a broader trade negotiation with the United States.
There is also plenty of reason to posture about the secondary sanctions themselves, because India would really like to keep the status quo flowing, and one way to do achieve that objective is to convince the Trump administration that India will not back down.
In any case, we still have these points. India is therefore the easier target, and so we head to China, where stability is of paramount importance to the Chinese Communist Party.
You see, the CCP does not have democratic legitimacy to fall back on, nor does the current ruling power benefit from having a consistently underperforming opposition group.
Actually, autocratic governments tend not to have official political opposition groups at all. But they have to be more concerned about what happens during an uprising, because autocrats have a nasty tendency to end up exiled, jailed, or killed after losing power, rather than just living a quiet retirement.
The domestic economic implications of lost trade with the United States would be enormous.
Let’s use the coastal province of Guangdong, one of China’s manufacturing hubs, as an example.
In 2019, Trump imposed a 12% tariff on China.
Guangdong shed 6% of its manufacturing jobs. Given that losses increase more rapidly as the size of a tariff increases, a 100% tariff would be much, much worse.
Small and medium-sized firms tend to run on lower profit margins and have less cash on hand.
They would want to pass through more of the tariff to consumers so they will disproportionately be the first casualties.
Their predicament serves as a warning to Beijing. It may be tempting to try to continue importing Russian oil, just to see whether the West will hold up.
And, don’t worry, we will have plenty to discuss on that front in a moment.
But when those factories shut down, their workforces will leave, and perhaps depart the area completely for their rural hometowns.
They were only there for work. If there is no work, they might leave to look for more meager employment in near-subsistence agriculture.
Hence there is a deeper problem. One cannot simply restart U.S. trade six months later and expect everything to return to normal.
Even the factories that do manage to survive will have to cut hours.
Many low-wage employees need constant overtime scrape by. They will find themselves struggling.
There are domino effects here. Cities with manufacturing sectors also have a ton of service workers who feed and entertain those people making money in the factories.
If there are no dollars coming in, then they too will be out of work.
It will even cause problems in those aforementioned rural areas. Family members who left for manufacturing centers still send remittances back home. Those too will vanish.
You might start worrying about further domino effects on the lingering Chinese real estate bubble, but we are now starting to get too far afield.
Side note, though: it is not reassuring when the article from Wikipedia clocks it as: “2020 to present.” The point is, you may end up having a ton of unemployed people, staring down a major recession, marching on the streets.
And if there is one thing that the CCP fears the most, it is collective action being taken on the streets of China.
Now, maybe China will go ahead and try abandoning U.S. trade regardless. Then there are a couple of points worth highlighting here.
First, the money going to Russia will go down one way or another.
China will eat an enormous cost on the forgone trade with the United States. But that weakness has some fringe benefits elsewhere.
Indeed, it adds to China’s bargaining leverage with the Kremlin, allowing the senior partner in the coalition to demand an even lower price on the oil.
Currently, the discount is only about $5. How close China can get to Russia’s production cost is hard to guess, but a good baseline minimum might be double that.
It may not be a catastrophe for Russia’s war effort, but it certainly will not help.
Then again, second, there may be some help for a different reason. There is a risk this all might backfire.
Over the last three years, one of the reasons that China has not provided direct weapons to support Russia is to avoid Western sanctions.
Well, if the sanctions are already in full force, that disincentive is no longer there.
So no more limits to just dual use goods. As long as Russia is willing to pay, China might send the bombs directly— uhh, to forward to Ukraine.
Now let’s go up to the first step, on whether Trump will go forward with the plan at all.
And the basic point here is that we should be paying attention to this one, despite plenty of recent behavior that would seem to suggest otherwise.
I am not saying this just because of a change in rhetoric or a spat with Medvedev.
Those very much fall under the traditional warning.
Then again, moving nuclear submarines is actually doing.
Thank you for your attention to this matter.
I think that the secondary sanctions plan has not received the amount of attention it should because people have learned that Trump makes a lot of tariff threats that ultimately go nowhere. Understandably, they are just tuning this one out.
Well, let me explain why this may be a different beast. The reason that the “Liberation Day” tariffs get ignored is because they are economically silly.
They are an incredibly inefficient way to try to get manufacturing jobs back to the United States. Anyone in policy circles is well-aware of this.
Anyone who is not only needs to be reminded that the United States threatened to sanction a bunch of penguins.
Even the markets hardly seem to react to tariff threats at this point, though the early August saga may be signaling a change there.
In any case, on the international stage, not much has happened with them. It’s a TACO buffet because there will be electoral consequences for Trump imposing massive tariffs that will hardly accomplish their goals.
And still, despite that, the United States is getting concessions. Lots of people in Europe are upset with their trade deal. But this happens because there remains a chance that if there is no movement at all, Trump will impose something, and avoiding that something is worth making the concessions.
Actually, even within these “deals” the United States is still imposing new tariffs. So the idea that Trump never does anything here is fundamentally false. They just tend to get toned down and still remain of questionable economic value to the United States.
It is also worth pointing out that the markets may not be responding anymore because they think that some type of deal will be reached, not that Trump will fail to follow through absent an agreement.
Those are observationally equivalent in whether a massive selloff occurs, but most analysis I see seems to miss this confounding factor.
To use an analogy that you are familiar with, if you switch to a more belligerent leader, the first-order consequence is that the bargaining space favorably shifts for that country. It does not mean that a war will break out.
But unlike the silly trade disputes, the secondary sanctions are serious business.
They are the type of policy that the Biden Administration had considered implementing but chose not to out of escalation fears or economic concerns.
Meanwhile, Trump gets hammered all the time about his soft Russia policy so far, but overall his administration has been adventurous in security affairs.
In just six months, we have seen a lengthy operation take place along the Red Sea against Yemeni Houthis, and the United States bombed Iran’s nuclear facilities. Regardless of whether you think that was a good idea, we should all agree that he took a gamble there.
The perception persists that Trump’s “America First” doctrine means American isolationism.
But given the attitudes in both the Pentagon and the State Department, it is more like America First means that America will do what it wants, and the rest of the world can just deal with it.
The internal debates within the administration are not about whether to intervene. They are about how much to intervene while still trying to pivot to the Indo Pacific.
The leak Signal chat laid that one bare.
Again, the target country that would feel the most pain if sanctions were implemented would be China.
Trump has tariffed China a bunch in the past, so we should already be moving out of that TACO mindset.
Meanwhile, the United States also just ended the de minimis trade loophole that allowed imports under $800 to skirt tariffs.
The loophole has disproportionately benefited Chinese retailers, which ship to order and thus can sell products without having to cover the tariffs that a bulk wholesaler faces.
Furthermore, one of the central reasons that Trump wants the war in Ukraine to end— and one that we were talking about way back in December— is that China is getting rich off the conflict, and that will make handling Indo Pacific affairs more difficult.
I also mentioned in that video that a more elegant solution to that problem would be to just sanction China rather than undermine Ukraine’s bargaining position.
Well guess what? Here we are almost eight months later, and that is what is on the agenda.
Also unlike the trade tariffs, there is massive bipartisan support for the secondary sanctions.
Again, almost the entire Senate is a cosponsor of the corresponding bill.
In contrast, Congressional Republicans vary in their opinions on the trade war tariffs. Some are supportive, but plenty are reluctant.
Put simply, there is unity on Capitol Hill regarding secondary sanctions. That is not true for generic protectionist tariffs.
So, yes, Trump loves to play performative politics—that is, creating problems that he can then “solve”, which keep him in the news cycle.
Heck, it does not get more performative than sanctioning penguins— go easy on them, Sidney Crosby’s career is coming to an end on a team that wishes it could be mediocre.
But this is not one of those performative domains. And if there was any doubt about that, the reports on India already cutting Russian oil imports should give us some pause. That would not happen if Indian intelligence was assessing that Trump was certainly going to back down.
So, sure, continue having the TACO discussion on trade war tariffs.
But we need to move past that on the secondary sanctions.
Indeed, if this were a standard sort of trade dispute, it is exactly the type of thing that would result in punitive tariffs.
Let’s talk about corn for a moment. The United States subsidizes every kernel of the industry, to the endless frustration of its trading partners.
Subsidies allow uncompetitive farmers to stay in business. Thus, the amount of corn that exists in the world is artificially inflated.
In turn, when competitive corn farmers in other countries try to sell their yields on the global market, they cannot fetch the higher prices that they deserve.
The United States counters that food production is a national security concern, so the subsidies stay. This is the exact type of policy that ends up at the World Trade Organization’s dispute resolution system, which often approves retaliatory tariffs to combat those anti-competitive subsidies.
Well, think about how the oil market operates now. It is a bifurcated system, with Russian oil going to some countries, and the rest of the market operating as normal.
China and India get to leverage Russia’s isolation into a discount on oil prices.
But every Chinese and Indian industry that is using oil as an input—which is basically every industry, period—has an unfair competitive advantage against Western companies.
Well, the way that you would adjust to that is by levying a tariff on those goods. It would not be a 100% tariff perhaps, but it would be something.
The point is that these secondary sanctions have a perfectly normal economic rationale, even in a world where the West did not care at all about Ukraine.
Now, please do not take away from this video that I am positive that Trump will impose sanctions. I am not—and we have not yet covered all of the downsides associated with the policy.
The central problem for the United States is that, one way or another, this will also cause the U.S. economy to explode to some degree.
Thus far, we have implicitly covered most of the problems that will arise if everyone fails to comply. Remember, deadweight loss is split between the producer and the consumer.
In other words, Americans are either going to see higher prices or empty shelves in stores.
U.S. exporters will also be hit. China would almost certainly strike back with reciprocal tariffs. Pity the soybean farmers of America.
The only thing that I will add here is that you will see major supply chain disruptions as well.
Much of what China exports are input goods for products that the United States makes.
If one input is absent, then the end manufacturer stops putting in orders for the rest of the inputs, never mind that the output good never makes it to consumers.
Consequently, there are American companies that have nothing to do with China that may still find themselves driven to bankruptcy.
You have experienced this once in the recent past with the pandemic.
Get ready for another round of it if secondary sanctions take effect.
But the problems do not go away if China and India comply. All of that oil leaving the global market means that prices on what is left will increase.
This is not a huge disaster for the White House—reminder that the United States is a net oil exporter.
Still, that means higher gas prices for consumers and inflation across the board.
How do you solve that?
Umm. You don’t. You hope that Saudi Arabia will pick up the slack. Higher prices will indeed convince Riyadh to release supply, but it will not be a one-to-one replacement.
There is some subtly to Saudi Arabia’s oil strategy, that extends to the rest of OPEC.
The goal is not to have a fixed quota of oil produced.
It is to make sure that crude prices stay low enough to keep U.S. shale producers from investing in new wells, so that Saudi Arabia can sustain long-term profits.
That incentive is not sensitive to whatever is going on with Russia’s military forays. So if secondary sanctions cause oil prices to spike, Saudi Arabia will want to make a serious move.
That leads to an open question of why the United States does not use the threat of secondary sanctions to enforce a much stronger price cap on Russian oil.
Say, demand a $20/barrel discount.
If India and China comply, then they can continue trading as normal with the United States.
The central problem with the existing price cap is that the West tries to enforce it by denying insurance to tankers that are selling above the cap.
But that has led to a Russian shadow fleet operating outside of the system.
As long as you can monitor the payments, you are still good. Maybe that is a strong assumption, but resolving it would help keep global oil prices steady.
Enforcement with China may be a problem for a different reason, though. Official purchases could comply with the price cap, but then the government just forwards a separate “aid payment” to Russia. Russia ultimately gets money above and beyond the price cap.
Of course, a lower price cap does not resolve the problem of China growing richer—and therefore stronger—as a consequence of the war.
But there is no reason not to implement it with India. India is a territorial rival of China’s, so empowering India is actually helpful for the overall U.S. strategy in the region.
So, to cap this here, I do not know whether Trump will follow through.
But I can say that doing so may be the highest leverage decision of his presidency so far.
And there is a higher chance that it will happen than the conventional wisdom believes. In turn, we really ought to be talking about it more.
Thanks again to Ground News for sponsoring today’s video. Yeah, it’s been a long one. Maybe you forgot that they are justifying such a long production. But you can thank them by going to ground.news/linesonmaps or scanning the QR code on your screen to get a 40% discount on a Vantage Plan.
And if you enjoyed today’s video, then please like, share, and subscribe, and I will see you next time. Take care.
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