Market commentary
Trump’s trade war: Not tariff-ic.
The possible imposition of tariffs on Canada and Mexico and the actual implementation of a 10% across-the-board tariff on China have the potential to increase prices and lower economic growth. The precise impact is still unclear since we do not know how aggressive the tariffs will be or how long they will stay in place. We do know that tariffs on goods from Colombia were short-lived and that this president loves to make deals.
Trump’s trade war: Not tariff-ic
Tariffs imposed on Mexico, Canada, and China
It almost looked as if that guacamole dip and the tequila for those margaritas on Super Bowl Sunday were about to get more expensive for U.S. consumers after President Trump announced his intention to impose a 25% across-the-board tariff on Mexico beginning February 4. However, the day before the tariffs were to become effective, the implementation was delayed for a month after Mexico agreed to send 10,000 troops to the border to combat the flow of fentanyl into the U.S. A few hours later, Canada also gained a one-month reprieve from a planned 25% tariff (with an exception for energy, which faced a 10% duty). Meanwhile, China has been hit with a 10% tariff, but might be rescinded or altered pending negotiations.
While investors, businesses, and consumers are breathing a collective sigh of relief, President Trump’s plans regarding future tariffs remain a great unknown. We may see more product-specific duties on semiconductors, steel, aluminum, pharmaceuticals, and other items by mid-February. Until now, markets had taken all the tariff talk pretty much in stride, perhaps on the assumption that Trump’s threats were more negotiating bluster than a serious policy. Even with the reprieve, investors face a new and uncomfortable reality.
Why?
First, it is well known that Donald Trump for decades has been incensed over the U.S. trade deficit. As shown in Exhibit 1, the merchandise trade balance has been widening for the past three decades, well before the emergence of China as an exporting powerhouse after it joined the World Trade Organization (WTO) in December 2001. There are many reasons for this deterioration in the U.S. trade balance, including:
- A heavily consumption-focused economy
- The impact of globalization and the hollowing out of U.S. manufacturing capabilities
- A national savings rate that is well below the rate of investment (requiring massive capital inflows that are the mirror image of the current account deficit)
- Disparities in tariff and non-tariff barriers that disadvantage U.S. exports, especially for agricultural commodities
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