A few days ago, US President Donald Trump announced import tariffs of 25% on goods from Canada and Mexico and a 10% tariff on Chinese goods. With a lower 10% rate on Canadian oil products, by the way. These measures are scheduled to start tomorrow and are intended - according to the US administration - to put pressure on these countries regarding migration and drug trafficking into the US. Europe, according to Trump, is poised to get hit by levies as well. [Note: reports just in, tariffs against Mexico have been delayed by a month.]
Before his inauguration, Trump had already shouted from the rooftops that he would introduce tariffs immediately on his first day. Then that was pushed back to Feb. 1. And now we’ve seen another few days of respite.
Reactions
Inside US: political reactions
Within the Republican Party, opinions are divided, but the vast majority of GOP politicians opt for silence or vague responses. Still, there are members of Congress who support Trump's plan. For example, Senator for South Carolina Lindsey Graham stated "I'm glad to see us pushing back against China and Mexico when it comes to the fentanyl poisoning of America." Others, such as Kentucky Senator Rand Paul, criticized the levies: "Tariffs are simply taxes. We won the last election by complaining about Democrats' policies, which gave us high prices. Tariff lovers will be forced to explain the persistence of high prices." That Paul in particular does speak out is understandable for two reasons: he is an outspoken libertarian and he represents a state that usually gets hit hard when other countries hit back with tariffs. Kentucky makes a lot of bourbon, and when other countries want to hit typical American products, whiskey is an obvious and eye-catching target.
On the Democratic side, it is once again clear that the party is still floundering on its back, as initial reactions, led by Senate Minority Leader Chuck Schumer, while critical, were fairly muted. Democrats simply have no idea yet how to effectively battle Trump and lack a clear leader.
Inside US: businesses
Business leaders urge President Trump to reconsider the "devastating" tariffs. They fear that these measures could spark a global trade war that would harm American industries and consumers. Industry associations such as the Aluminum Association and the National Association of Manufacturers highlight the negative impact on supply chains, rising costs and the risk of job losses. The National Association of Home Builders warns of higher construction costs due to more expensive materials.
Although some sectors, such as the U.S. steel and aluminum industries, benefited from import tariffs in previous situations due to reduced foreign competition, we have not picked up significant support or positive reactions from the business community anywhere.
Inside US: influential commentators
The business newspaper The Wall Street Journal - which usually support the GOP - has sharply criticized the new tariffs, labeling them as the dumbest trade war in history. They argue that the justification for this economic attack on neighboring countries makes no sense. This is by and large the predominant view of experts.
Before Trump made his most recent tariff announcement, there were certainly voices advocating import tariffs. Trump's trade adviser Peter Navarro said earlier that trade measures are essential to restore U.S. sovereignty in trade and to increase pressure on countries that he believes are not acting fairly. He stressed that tariffs are a way to protect the U.S. from what he called "economic aggression" from China and help revive American industries.
Conservative commentators and hosts such as Steve Bannon, Sean Hannity and Tucker Carlson reasoned along the same lines: tariffs were presented by these men as instruments to restore the balance of power in the global economy, to put "America First" into practice, as a necessary correction to years of terrible trade deals that have disadvantaged American workers and to get the better of the fentanyl problem.
However, it is also fairly quiet from this angle for now; concerns about the potential economic and political consequences seem to prevail.
Canada & Mexico
Both countries responded by announcing their own import tariffs on American goods. For example, Canada plans to impose tariffs tomorrow on some $100 billion worth of American products, including bourbon, cosmetic items and orange juice (important to Trump's "home state" of Florida). If no compromise is reached after three weeks, levies on the remaining roughly $85 billion in U.S. products heading to the northern neighbor will also follow. Mexico did claim to strike back, but the specifics were not yet known at the time of writing.
China
China has condemned Trump's actions as a violation of World Trade Organization (WTO) rules and announced that it is filing a complaint with the WTO. In addition, China has threatened "corresponding countermeasures."
In response to US accusations that China is not doing enough to limit fentanyl exports to the US, China's Foreign Ministry has stressed that the US is responsible for its own fentanyl problem. China also pointed to its strict anti-drug policy and stressed that it already has extensive cooperation with the U.S. on drug control.
Despite escalating trade tensions, China has indicated it is open to dialogue to avoid further conflict. According to reports, Beijing is preparing a proposal to resume trade talks with the US, with the aim of returning to the 2020 "Phase One" trade agreement. handelsovereenkomst van 2020.
Potential New 'Victims'
So the European Union has been warned that they are definitely up for tariffs. This has led to preparations for possible retaliation.
Economists
The vast majority of economists are very negative, expressing concern about the effects on global trade, inflation and disruption of global supply chains. Some argue that the US will suffer more damage than the affected countries due to higher consumer prices and lower exports.
Financial markets
Financial markets responded with greatly increased volatility. The dollar gained ground - logically as we have explained in detail in previous reports - while equity markets were spooked. US two-year yields rose a bit, probably in expectation of rising inflation, and crypto currencies had to take a big hit. Furthermore, the price of oil has risen considerably due to fears of disruptions in energy trade between Canada and America (which can also be seen in the spread between WTI and Brent; the price of the former has climbed closer to the latter). The overall impression is that of a risk-off atmosphere, only gold's price development does not fit into that. Gold did not react much, if at all, to Trump risking a full-on trade war; apparently the reaction to the rising dollar was stronger.
That we cannot get the markets all neatly "aligned" fits the picture of the great uncertainty surrounding what Trump wants and will do. There is still much ambiguity: for how long will the tariffs apply, will there be all kinds of exceptions, will the tariffs be raised further and rolled out more broadly, how do others strike back?
Scenarios
Optimistic scenario: A quickly reached compromise in which the U.S., Canada, Mexico, and China come to an agreement that reduces or eliminates tariffs. This would stabilize markets, barely adversely affect economic growth, if at all, and allay renewed inflation fears. In this case, the stage is also set for more interest rate cuts by the Fed.
Moderate scenario: An extension of trade tensions without significant escalation, with countries adjusting to the new trade conditions. This would lead to restructuring of supply chains, a slight economic growth slowdown and some upward inflationary pressure. This would make the Fed's job harder though, as the central bank would have to navigate between two fires: fighting slowing growth on the one hand and addressing rising inflation on the other.
Pessimistic scenario: A full-blown trade war with escalating tariffs and countermeasures in which Europe is also dragged along, which would result in a significant decline in world trade, sharply rising inflation again, and possibly a recession in the U.S. and elsewhere. This scenario is considered very likely by some analysts given Trump's determination to push ahead with his policies. The Fed dilemma mentioned above only gets worse in this scenario. It would therefore be obvious that in Europe and China, among others, there would be more fiscal stimulus to boost the domestic economy.
Should we bury moderate optimism?
We were leaning toward the moderate scenario before this weekend, but the risks for the pessimistic scenario have risen sharply. Indeed, in his first few weeks, Trump is going full-on MAGA:
- The DOGE initiative led by Elon Musk to cut away excess government fat has opted for putting the pedal to the metal and an elephant in the china shop approach. The danger is, among other things, that so much institutional knowledge is lost, that all sorts of essential processes get bogged down.
- With people like Pete Hegseth and Kristi Noem, Trump is showing that he knows how to get highly controversial people into important posts. Not to mention some of the nominations that have yet to be approved by the Senate.
- The much more far-reaching pardon of attackers of the Capitol than even most right-wing commentators expected is also a sign of things to come.
- And so now we have Trump pushing through high import tariffs even on two friendly countries.
We still lean toward the idea that Trump wants to get off to a flying start, to show his supporters that he is keeping his promises and that he is serious about shaking things up, but that once the first blows have been dealt and Trump has been able to present victories, he will slow down. The vague demands associated with the announced tariffs also make it relatively easy to claim as victories small commitments and pledges by the three affected countries. Then Trump can claim that, having worked 'little' Colombia on its back, he is also bossing the big boys around.
In the long run, we suspect that Washington's current course will be bad for America. Other countries could have thought eight years ago that after four years of Trump, the US would go back to "normal”. But now there will be more of a perception that the Biden years may have been the exception and that Trump's America First policy is and remains the new normal. In last week's Global Political Analysis, we discussed five scenarios for the world order in the coming years. Recent developments increasingly point toward one of the two following scenarios or a combination of them:
Anarchy in a leaderless world: The superpowers avoid direct conflict, but Trump's isolationist policies create a leadership vacuum. Global economic growth slows due to trade wars and regional conflicts escalate. The UN and other international organisations lose influence, and humanitarian crises, refugee flows and violence increase. Ian Bremmer of Eurasia Group calls this international constellation the G-Zero World. This as a counterpart to the G-2 concept first used 20 years ago by C Fred Bergsten to indicate that China and America would call the shots together in the 21st century.
Globalisation without America: The US withdraws from international trade institutions such as the WTO and raises trade tariffs to high levels. This leads to economic stagnation in the US, while other regions continue to globalise. The EU makes trade deals with Latin America, India and China, and the influence of emerging markets such as the BRICS group grows. The use of the US dollar declines worldwide, while China expands its economic dominance.
