For investors who thought President Donald Trump’s tariff threats were merely a negotiating tool, what more needs to happen before they realize he is serious and willing to risk global weakness to get his way on trade issues?
Trump has now followed through on his threat to impose duties of 25% on imports from Canada and Mexico, while granting a one-month exemption for tariffs on autos.H e has also raised duties on Chinese goods by 20% after having raised them by 25% in his first term. The three countries are the largest trading partners of the U.S., accounting for more than 40% of U.S. trade, according to the U.S. Bureau of Economic Analysis.
Meanwhile, the Trump administration has begun a comprehensive review of duties imposed on U.S. exports that is due by April 1. A White House article notes the aim is to formulate a policy of “reciprocal trade,” whereby the U.S. would set duties on foreign goods that match levies imposed on U.S. goods. If they are implemented, the proposal could hit developing countries such as Vietnam and India the hardest, because they have higher tariff rates than industrial countries.
However, a broader array of considerations are cited in the review to determine whether countries have pursued unfair trade practices. This makes it difficult to assess how pervasive the duties will be.
Trump, for example, has stated that the administration is planning to boost tariffs on goods made by the European Union by 25%, even though tariff rates in the EU are close to those in the U.S. White House officials have indicated that tariff rates would be based on taxes such as the EU’s value-added tax, as well as on non-tariff barriers that impose costs on U.S. businesses.
Finally, Trump has announced product-specific tariffs that will apply to agricultural products, lumber, steel and aluminum, copper, semiconductors, pharmaceuticals and automobiles.
Amid all this, businesses, consumers and investors understandably are confused about the consequences these actions will have for the global economy. Following are my takeaways.
First, the sweeping scope and magnitude of the prospective tariff hikes is unprecedented.
The Tax Foundation estimates that the Trump administration’s proposals that are country-or region- specific would impact about $2 trillion in U.S. imports, or 50% of the total in 2024. The tally shown below does not include the impact of reciprocal tariffs or product-specific tariffs, which have yet to be determined. The actions taken this week are estimated to increase the average U.S. tariff rate to 10%, the highest in the post-World War II era, and it will increase further as more tariffs are imposed.
Second, the statute used for implementing tariffs on Mexico, Canada and China was the International Economic Emergency Powers Act, which authorizes a president to manage imports during a national emergency. Trump is the first president to use it to justify tariffs, and the action effectively kills the United States-Mexico-Canada Trade Agreement that he declared was the “greatest trade agreement ever.” No justification has yet been provided for levying tariffs on goods from the EU.
Third, both Canada and China have taken actions to retaliate, and Mexico will announce its response on March 9. China announced 15% tariffs on various agricultural items shipped from the U.S., and the Ministry of Commerce said it added 15 U.S. companies to its export control list, which would ban Chinese companies from exporting certain equipment to the U.S., CNN reported.
Prime Minister Justin Trudeau warned that Canada will not back down from a fight, and he said 25% duties would be imposed on $155 billion of U.S. goods. CNN reports Trudeau also called Trump’s move “a very dumb thing to do.” Trump responded with a post on social media saying that when Canada puts on a retaliatory tariff, the U.S. will immediately increase tariffs by a like amount.
The end result is heightened uncertainty about the prospects for the global economy.
The main risk for Mexico and Canada is their economies could slip into recession if the tariffs are not rescinded. The likelihood is that European economies will face a third year of economic stagnation, while China will probably continue to experience subpar growth.
The U.S. economy’s performance was the strongest of the industrial economies at the start of this year. However, there are signs that growth slowed considerably during the first quarter, as consumers and businesses have turned cautious among all the changes the Trump administration is embarking upon. The risk is the economy could be headed for a bout of stagflation as tariffs boost consumer prices while the pace of economic growth moderates. If so, it will be difficult for the Federal Reserve to ease monetary policy significantly.
Finally, it is important for investors to recognize that the current situation is unprecedented during the post-WWII era.
Until recently, the negotiations between the U.S. and its trading partners left investors hopeful that trade deals could be struck, and many still believe tariffs will be temporary. However, the situation may be getting out of hand, and conditions may get worse before the conflict is resolved. Hopefully, the Trump administration will take its cue from the way financial markets are reacting to the threat of tariffs.
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