What tariffs have been announced?Hardly having got his feet under the Oval office desk, Donald Trump has shaken markets by announcing the intended implementation of significant tariffs on imports from Mexico, China and Canada. Initially due to come into force with immediate effect, but with the US now rowing back a little on timing, imports from Mexico are set to incur a tariff of 25%, with the same levy for Canada, albeit that energy imports from Canada will be subject to a reduced rate of 10%. Chinese imports will also incur a tariff of 10%. At present it is unclear as to whether this is a calculated tactic designed to send a message, and that in the event the tariffs will be withdrawn as fast as they were announced, or whether the US intends to dig in its heels. Either way, the short-term consequences for markets are almost universally negative. What impact will the tariff announcement have?In the immediate aftermath, China, Mexico and Canada have all announced retaliatory measures of their own, including counter-tariffs on imports from the US. However, after initial phone conversations between President Trump and his counterparts in Mexico and Canada, tariffs have been delayed for a month. Both Mexico and Canada have pledged to increase border security and prevent illegal border crossings and control the influx of Fentanyl. If tariffs were to remain, a near-term knock-on effect would be a rise in prices in the US, exacerbating inflationary pressure. In terms of supply chains, the US has its closest ties with its direct neighbours to the north and south and disrupting these will have negative consequences for the labour market as well as putting pressure on prices. US exports to the three affected countries will also diminish. As significant as any of these direct economic consequences is the general uncertainty generated by the lack of clarity as to what end-game is envisioned and how long the tariffs will remain in place - something already weighing on global markets. What is the ultimate aim of the introduction of the tariffs?Trump has cited the control of both immigration from the south and the trade in fentanyl from China via Mexico as drivers for the tariff announcement, but the targeting of Canada makes less sense if these are the only aims. If, however, concern is focused more on the US trade deficit, then it would have made sense to target countries with which the US has a larger trade imbalance in order to bring greater pressure to bear. Starting with its two nearest neighbours, with whom bilateral trade and labour ties are significant, seems unnecessarily destructive. This seemingly muddled policymaking is part of the reason why markets seem hesitant to accept that Trump means to go through with the tariffs, as illustrated by the recent oscillations in the currencies of the three affected countries. How to protect from the potential consequences?Irrespective of Trump’s aims in announcing the tariffs, the most significant outcome has been an increase in uncertainty, and markets don’t like uncertainty. If the situation develops into a full-blown trade war, then the impact on global GDP - as estimated by the WTO - would be a double-digit decline. If it turns out to be more of an exercise in message-sending than a long-term policy, then by crying wolf, the US has merely served to undermine future trade relationships by casting doubt on its reliability as a partner. In all of these circumstances, being well diversified in terms of regions as well as asset classes such as alternatives which can potentially shield the portfolio from tariff related uncertainty.
Hoshang Daroga, Investment Director Elston Consulting Read in PDF Comments are closed.
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