The EU–India trade deal quietly changes the global trade game—and the President’s next move matters more than ever.
KEY TAKEAWAYS
The EU-India trade deal creates a meaningful alternative trade corridor
Europe feels less cornered by US tariff threats
Escalation and retaliation is the outcome both sides want to avoid
Credibility matters more than action in trade brinkmanship
Markets price ambiguity faster than policy
MY HOT TAKES
Tariffs are leverage, not destiny
The EU-India deal shifts behavior at the margin, not overnight outcomes
Escalation works best when it remains a threat
Clear messaging matters more than toughness
Earnings season may temporarily anchor markets amid headline noise
You can quote me: “ Markets don’t fear threats–they fear ambiguity.”
Your move, Mr. President. Well, it’s a new year and the administration has wasted no time hitting the ground running with amplified trade rhetoric. I have repeatedly stated that based on last year's positive results in the markets and the US economy, an “all clear” has been given for the administration to test out some new plays from its playbook. Plays, likely to be non-traditional and possibly volatility-causing. The Venezuela Affair and–as I like to call it–The Greenland Gambit have already been rolled out. Both are far from resolved but they have already provided us with a little bit of intelligence on the market perception. The Greenland Gambit employed massive tariff threats and drew immediate retaliation by EU members and the markets. Somewhat unrelated but also related ( 😉) is an unresolved threat by the US to tariff Canadian imports at 100% if it strikes a deal with China–which it has (reported here yesterday).
This morning, we woke up to a possible new chapter in the ongoing, high stakes, game of global trade. The EU and India have announced a massive trade deal. The EU-India trade deal is a long-negotiated free-trade agreement that finally crossed the finish line after years of stop-and-go diplomacy and shifting global politics. It cuts or phases out tariffs on the vast majority of goods flowing between Europe and India, with Europe gaining improved access for autos, machinery, chemicals, and spirits, while India secures broader entry for textiles, pharmaceuticals, and manufactured exports. Sensitive areas, especially agriculture, were carefully carved out or slow-walked (no surprise, EU is sensitive to those), which is trade-speak for “everyone protected something politically important.” Beyond goods, the deal reaches into services, investment rules, and regulatory cooperation, signaling an intent to lock in supply-chain depth rather than just swap goods. Framed publicly as “economic diversification” and resilience, it quietly creates a massive alternative trade corridor at a moment when global trade is becoming more fragmented, not less. In case you didn’t recognize it, that last sentence really means that the EU is trying to end-run the US. Remember that EU imports are currently tariffed around 15% (50% on metals) and India 50%.
Clearly, the EU and India’s attempts to “diversify” US trade risks with this new framework is not going to escape the administration, which has not yet–at least at the time of this writing–responded. One would think, based on last week’s market response to the trade saber rattling, that the President would carefully think out his response. I thought it would be interesting to game out the next moves in what I would call “Three Lane Chicken.”
Three Lane Chicken is just the childhood game of chicken with a modern upgrade. Two cars are pointed at each other on a narrow road. Each driver has two basic choices. Keep going straight and hope the other person swerves, or swerve first and avoid the wreck. The drama, of course, is that the worst outcome is when neither driver swerves, because that’s where you get the… well, crunching metal, the ambulance sirens, and… you know the rest from the TV commercials. In trade terms, that “crash” scenario is the one where tariffs escalate, retaliation escalates, inflation creeps back into the narrative, and markets do what markets do best when they’re confused: they throw things.
The reason I’m calling this Three Lane Chicken is that the EU just found itself an extra lane. That extra lane is India. In the old version of the game, the EU’s incentive to swerve was partially driven by one uncomfortable truth: the US consumer ( ♥️ ) is still the world’s biggest prize, and losing clean access to that prize is painful. But when you build a large enough alternate route, the fear of losing the old route fades. The EU-India agreement is not a magic portal that replaces the US market overnight, but it is large enough to change behavior at the margin. And as any economist will tell you, most decisions that move markets are made at the margin.
This deal doesn’t mean Europe suddenly stops caring about the US. It means Europe feels less cornered by the US, and that matters. When a player feels less cornered, they behave differently. They bluff less nervously. They retaliate more confidently. They swerve… em, later, if at all.
The President’s decision tree, meanwhile, looks deceptively simple. He can escalate tariffs on Europe, or he can signal negotiation, delay, carve-outs, exemptions, and optionality. Europe can accommodate, or it can retaliate. That’s it. That’s the whole game. No secret trap doors. No hidden levels. Just two players, two moves each, and very different outcomes depending on how those moves combine.
For the readers who prefer to see this dressed up in academic clothing, the payoff matrix looks something like this. This is standard fare for economic game theory. Check it out.
What the matrix makes clear–without requiring a semester of game theory (trust me, you don’t need that 😉)--is that there is exactly one outcome both sides are desperate to avoid. That’s the box where escalation meets retaliation (upper right-hand box). That’s where tariffs stack on top of tariffs, inflation risk re-enters the conversation, supply chains get repriced, and markets stop trying to read between the lines on intent and start pricing damage. No one “wins” there, politically or economically (hence, 0 outcome for both sides).
The key insight is that escalation only works if it isn’t completed. The US achieves its best outcome when the threat is credible enough to extract concessions, but not so rigid that it forces Europe to show its teeth. Europe, meanwhile, benefits from signaling a willingness to retaliate, but not from actually pulling the trigger unless it’s cornered. Once retaliation becomes believable, restraint becomes valuable.
This is where the EU-India deal quietly changes the math. By giving Europe a meaningful alternative trade corridor (lane 3), it lowers the cost of standing firm. That doesn’t guarantee retaliation, but it makes the threat of retaliation credible. And in games like this, credibility alters behavior more than action. Once both sides understand that the other may not swerve automatically, the incentives shift away from collision and toward negotiation.
All of this fancy game-theory talk taken together, the matrix points to a familiar equilibrium. Tariffs are used as leverage, not destiny. Sabers are rattled, deadlines are floated, exemptions are hinted at, and negotiations quietly re-enter the frame. The objective is not to drive straight into the crash, but to swerve late enough that the other side knows you were serious.
Clear messaging matters here more than usual. Markets can live with threats. They struggle with ambiguity. If the administration frames any response as targeted, conditional, and negotiable, investors can absorb the headline and move on. If the message sounds open-ended or punitive for its own sake, markets will assume the worst and price it accordingly.
None of this means the headline risk disappears. Quite the opposite. Trade has become a recurring macro variable, not an occasional shock. A tariff threat now functions like an economic release. A presidential comment can move markets the way a central bank headline used to. That’s the environment we’re in.
So yes, Mr. President, it’s your move. The hope is that the move is designed not to win the crash, but to avoid it. Swerve early enough to keep inflation contained, stay loud enough to keep leverage intact, and clear enough that markets understand the likely endgame. Right now, focus beats panic for investors. And for now, these headline risks will continue to dominate the road ahead. Thank goodness we are in the heat of earnings season, which should provide us with plenty of important information about the health of the companies we invest in. Focus. 👀
YESTERDAY’S MARKETS
Stocks shrugged off trade rhetoric between the US and Canada and the unfortunate death of a protestor in Minneapolis to find its rally legs in yesterday’s session. The risk did not escape Gold or the dollar, however with one rocketing higher and the other plumbing some fresh ‘26 depths–in order.
NEXT UP
ADP NER Pulse (Jan 3rd) comes out this morning with the last reading a positive but small and declining 8k new jobs.
FHFA House Price Index (November) is expected to have increased by 0.3% after gaining by 0.4% in October.
Conference Board Consumer Confidence (January) may have improved to 91.0 from 89.1.
The Fed starts its 3-day deliberation on rate policy today, but you'll have to wait until tomorrow to find out where they end up. Markets expect no change in rates.
Important earnings today: Northrop Grumman, UnitedHealth Group, Roper Technologies, RTX, Synchrony Financial, Susco, Commvault, NextEra Energy, American Airlines Group, Boeing, UPS, JetBlue, HCA Healthcare, Kimberly-Clark, GM, Invesco, Union Pacific, PPG Industries, Texas Instruments, Nextpower, and Seagate.