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Is Donald Trump serious about tariffs? This has been the question hanging over not just world markets but the whole world of economics. The popular wisdom suggests that he wasn’t really that serious, and the key bit of evidence for that was his nomination of hedge fund investor Scott Bessent as his Treasury Secretary, someone seen as a moderate when it came to tariffs. I have suggested, in previous weekly comms, that we must remember that Trump sees himself as the great businessman, starting high in his demands and being open to negotiations, providing he gets the deal he wants for America. Tuesday this week saw the President (elect) back to his tweets, reminding us that he is indeed serious about tariffs, and in the most unexpected way.
This week he chose to target Mexico and Canada, as well as China, and in doing so he is confirming the threats made on the campaign trail that appeared the most fanciful. For starters he is willing to collapse the Mexico-Canada-America trade deal, that he signed in his first term, on day one of his second term. These countries currently have a “no tariff” trade deal,” signed by Trump, that he is evidently willing to disregard on his return for a second term. Importantly, the rationale for these moves is not about trade or economic policy. These tariffs are about getting Mexico, Canada, and China to alter their policies on crackdowns over migration and illicit drugs. Trump is using tariffs as a weapon of diplomacy and coercion, on topics entirely unrelated to global trade, but very important to him.
These tariffs are certain to have economic impact. The cost of washing machines in the US rose 12%, or by about $86, after Trump hit foreign-made machines with a 50% tariff during his first term. Such increases, no matter how modest, run counter to Trump's promises during the campaign to bring down the cost of living. Though Americans might be more sensitive to price rises now than they were in 2018, the political appetite for tariffs should not be underestimated.
It is important to reiterate that Trump wants to fundamentally change the global economic trading routes and reduce China and Europe’s trade surplus with the US, which he views as “ripping off America.” The US is undoubtedly powerful enough to start rebalancing world trade, however if Trump pushes things too far though, especially with G7 and G20 allies, then he might find himself rather isolated. Hence, we return to the original question, is this bluff or bullying?
European Central Bank president Christine Lagarde, in her first interview since Donald Trump’s election victory, told the Financial Times this week that European leaders needed “not to retaliate, but to negotiate” with Trump on trade, and warned of the effects of a global trade war. She said that Europe should deal with a second Trump term with a “cheque-book strategy” in which it offered “to buy certain things” from the US, such as liquefied natural gas and defence equipment. She said the fact that Trump had stated a range of 10 to 20 per cent for tariffs on non-Chinese imports suggested he was “open to discussion”, creating an opportunity to “sit at the table and see how we can work together”. Lagarde also warned that a “trade war at large” was “in nobody’s interest” and would lead to “a global reduction of GDP.” The ECB are evidently taking him seriously.
Economists suggest she is right to be concerned as they believe Trump’s threat of significant tariffs on Chinese exports to the US could lead China’s manufacturers to flood European markets with their products, presenting a further threat to domestic competitiveness.
It is not just economists that are focussed on Trump. The Biden administration said Ukraine must recruit more soldiers to repel Russia’s 33-month long invasion, including by lowering the draft age, as a lack of manpower rather than weapons is the country’s most pressing need. They have suggested that President Zelensky’s government should consider lowering the recruitment age to 18 from 25 to create a much-needed pipeline of new troops to rotate into the front lines. Meanwhile, the prospect of more US weapons and ammunition for Ukraine in the new year is in doubt. President Trump has long been an opponent of helping Ukraine defend against Russia, and he has selected an 80-year-old former general, Keith Kellogg, to be special envoy for Ukraine and Russia. Kellogg has strongly proposed that Ukraine would only get further US aid if Kyiv participated in peace talks with Moscow, as Trump focuses on his first goal of brokering a deal in Europe.
For those readers that are already tired of Trump, my apologies. What is clear is that he is going to be central to market direction in the coming months and therefore he does occupy our thoughts. Many other global events have the potential to push him off the front page, such as the Middle East or a conflict between China and Taiwan. Trump is certainly looming large on the horizon, and it won’t be long before his words will become policy, and tweets will drive markets once more. Until then, markets do appear quite relaxed about the impending return of Trump, so let us enjoy the calm for now, and do have a good weekend.
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