Trump straight out of the gate in his second term is keeping with his campaign promise of aggressively wielding the tariff flamethrower. We expected that the trade partners affected were poised to retaliate and they have acted accordingly. From here the higher import prices will be an issue. The questions with regard to inflation and growth are will the price impact be passed on and will currencies move to compensate price moves?
President Donald Trump ordered top economic officials in February to calculate new US tariffs based on the total tariffs and tax, regulatory, currency and any other barriers that US exports face. The new ‘reciprocal’ duties would be calculated country by country. By April 1 (April fool’s day) officials would first examine the economies with which the US has the largest trade deficits. ‘The numbers are going to be very fair but staggering. They’re going to be large,’ Trump told reporters.
President Trump imposed 25% tariffs on steel and aluminum in February, which will go into effect on March 12 with Australia potentially receiving an exemption. On March 4, 25% tariffs for Canada and Mexico went into effect today and tariffs on China increased by 10% to 20%. There is increased uncertainty around the trade war after the countries announced retaliatory actions.
President Trump said illicit drugs such as fentanyl are being smuggled into the United States at ‘unacceptable levels’ and that import taxes would force other countries to crack down on the trafficking. ‘We cannot allow this scourge to continue to harm the USA, and therefore, until it stops, or is seriously limited, the proposed TARIFFS scheduled to go into effect on MARCH FOURTH will, indeed, go into effect, as scheduled… China will likewise be charged an additional 10% Tariff on that date.’”
Tariff targets: List by biggest contributors to US trade deficit:
Graphic via BBG highlights partner specific, rather than sector specific policy Updated March 13. Interesting also who hasn’t been levied, such as energy from Saudi Arabia and pharmaceuticals from India.
The Market Response was Negative
With uncertainty it was not unexpected that the market on March 4 responded with trepidation and featured a negative bias over growth concerns and tariff uncertainty. Crude oil followed risk and retested its November low (66.61) before recovering the bulk of its loss. OPEC+ also said it plans to gradually increase its output on April 1, but it reserves the right to change its plan if there is a significant shift in market conditions. The US dollar struggled throughout the day, sending the U.S. Dollar Index lower by 0.9% to 105.76, a level last seen in early December.
The Dow Jones Industrial Average settled 1.6% lower; the S&P 500 was down 1.2%; and the Nasdaq Composite fell 0.4% all bouncing off lows mid-day. NVIDIA (NVDA 115.99, +1.93, +1.7%) helped after it flipped positive from a 3.4% decline at its low.
Ten of the 11 S&P 500 sectors logged declines. The heavily weighted financial sector, which includes 14.7% of the S&P 500 in terms of market capitalization, sank 3.5%. Six other sectors declined more than 1.0%.
Growth concerns followed earnings and guidance from retailers Target (TGT 117.14, -3.62, -3.0%) and Best Buy (BBY 75.20, -11.54, -13.3%). The companies warned that price increases are likely, which may impact consumer demand and lead to lower growth in earnings and in the economy. Target’s CEO also highlighted that the consumer has been cautious already.
Tariffs and Inflation
Let’s not forget goods price disinflation was instrumental in cooling CPI which offset prickly services and shelter inflation. That said the previous input of tariff by Trump and Biden defied the inflation fear and were largely a one-time price issue with only marginal enduring inflationary impact. However, since then we had the inflationary COVID inspired supply chain squeeze and a couple of wars. What we do know it won’t play out as expected, stay agile. Recognize that inflation has many triggers outside administration and Federal Reserve control.
American economist Adam Posen, head of the Peterson Institute and past external member of the BoE’s MPC noted that tariffs are not just a one-off price hike and emphasized deep ripple effects of tariffs throughout highly integrated supply chains. These could well cause pandemic-style shortages making the supply side is highly vulnerable to tariff wars that would be very disruptive.
China Pressured
Meanwhile it should be increasingly apparent that China’s enormous export-focused investment spending is unsustainable, especially with the return of President Trump and Tariffs. Volcanic financial pressures continue to build within both local government finance and China’s bloated banking system. China now risks ballooning even more non-productive credit risks unleashing destabilizing currency instability to try and appear stronger to the U.S. and West. China’s renminbi has already traded to 16-year lows to begin the year. Yes, gold is at record highs but that is but a drop in their assets.
China’s Property bubble pop is real and barely mentioned despite its ongoing apartment bubble collapse. Throw on top of that the massive spending on new technologies including electrified vehicles, clean energy tech, renewable energy infrastructure, military, coal plants and more to offset weak apartment construction and consumption. While down from 2023, massive $4.5 TN system credit growth in 2024 was instrumental in sustaining growth.
EU Tariffs
“Donald Trump has threatened to slap 25% tariffs on imports from the EU, as he lashed out at the bloc, saying it ‘was formed to screw the United States’. The remarks came during the first cabinet meeting… ‘We have made a decision and we’ll be announcing it very soon,’ Trump said… ‘It’ll be 25% generally speaking, and that will be on cars and all other things.’ Trump’s comments raise the prospect of a broad transatlantic trade war that could hurt both the US and European economies and inflict greater damage on frayed diplomatic ties among the western allies.” February 26 – Financial Times (James Politi, Kana Inagaki and Barbara Moens)
EU Response
“The European Commission said… it will react ‘firmly and immediately against unjustified barriers to free and fair trade’ after U.S. President Donald Trump said his administration would soon announce a 25% tariff on imports from the EU. ‘The EU will react firmly and immediately against unjustified barriers to free and fair trade, including when tariffs are used to challenge legal and non-discriminatory policies,’ a commission spokesperson said…” February 26 – Reuters (Andrew Gray and Richard Lough)
Sources: Bloomberg, Reuters, TradersCommunity
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