Macroscope | Taco Trump? It’s traders who are chickening out now

On May 2 last year, Financial Times commentator Robert Armstrong came up with “Taco”, which stands for “Trump always chickens out”. This was meant to describe the sharp rally in stock markets following Trump’s decision in April to suspend his “reciprocal” tariffs.

Further climbdowns, albeit partial ones, convinced many investors that Trump’s bark was worse than his bite. While other factors contributed to the strong gains in equity markets last year – the hype surrounding artificial intelligence being the most important one – Trump’s trade policies ceased to be the main determinant of sentiment by mid-2025.

In a report on May 14, Barclays went so far as to say “the US – and the world – seems to have turned the page on tariffs”. While the Taco narrative quickly took hold and reinforced markets’ belief that Trump’s presidency was transactional and non-ideological, it was deeply flawed.

For starters, the pressure on Trump from bond markets was negligible. The yield on the benchmark 10-year US Treasury bond fell from 4.7 per cent just before Trump’s second inauguration to 4 per cent in early September. It currently stands at 4.1 per cent.

The most important force constraining Trump on tariffs was China. Beijing’s decision to impose curbs on the export of rare earth elements – more than 85 per cent of which are produced in China and used in the manufacturing of everything from weapons systems to iPhones – revealed the strength of China’s leverage, forcing Trump to back down.