Scott Bessent, the new US treasury secretary, said he expected President Donald Trump’s tariffs to be a loaded revolver put on the negotiating table that would not be fired. It looks like it has been fired. However, unlike a revolver, it can be unfired, as the delays to the implementation of some tariffs demonstrates.
The recent announcement on goods exported from Canada and Mexico into the US should have been expected. However, the size of the tariffs are significant: a 5 per cent tariff would eat into an exporter’s profit margin; a 25 per cent tariff stops you exporting.
Canada and Mexico are very different targets for Trump tariffs.
Regional differences
Canada mainly exports heavy crude oil to US refineries. The tariff announced here is lower – 10 per cent – but that is still greater than refinery margins. It would cost the US refineries a fortune to change oil source or to reconfigure for different crude feedstock.
After crude, Canada’s largest export to the US is cars – mainly ones made by Ford and General Motors. Goods face tariffs on the basis of where they are made and regardless of who makes them. Most of America’s largest companies are global and so have much to lose from a reduction in trade through tariffs.
Moving on to Mexico, this issue is illustrated. Many companies have built manufacturing capacity in Mexico to supply the US consumer. US companies are in the same boat as Japanese, Chinese and European companies that have established in Mexico.
Indeed, I recently bought a new Audi, believing it would be made in Germany. When I arranged delivery I found out it was coming from Mexico – and I would say the build quality is better by far than the previous one I bought that was made in Europe.
Tariffs are now threatened against the EU. This is a much more complex area, not least because the EU has a range of very high tariffs protecting, in particular, domestic steel, car-making and agriculture. While the US does have a modest trade deficit with the EU in goods, it has a large deficit in services.
Also, if the US becomes aggressive on tariffs in, for instance, cars, the EU could pivot towards a more accommodating policy towards China, outflanking Trump.
Due to a statistical oddity, the UK and the US both believe they have a trade surplus with each other. Even if this is incorrect, the imbalance is minor. In his first presidency, Scotch Whisky was singled out, while the EU retaliated with tariffs on jeans and motorbikes. It all seemed rather petty and was very small scale compared to the current spat.
Furthermore, central to previous tariff policies was China; steel, solar panels, but especially semiconductors. So far we have heard little on China.
At the stock level
Much of the rationale for the tariff announcements makes little sense. There is little chance of significant income coming from the charges – companies will export elsewhere, or the goods being imported will not be competitively priced for US consumers. Yes, tariffs will lower trade deficits in goods, but at the expense of lower economic activity.
For the US economy to thrive, it needs trade with the rest of the world to be steady, not declining. Lastly, other countries could easily attack large US companies in the digital area by way of reaction – after all, few of these pay the taxes we expect most companies to pay.
However, companies will get caught in the crossfire. The sectors that have generally been at the heart of trade wars are based in the steel industry. The EU emerged from the coal and steel community in the 1950s. Governments and trade agreements still start with steel tariffs (green or not) and car tariffs (electric or not). Indeed, the EU had been reconsidering their own tariffs on Chinese cars before Trump won his election.
A major question to ponder will be the impact on currencies, the Federal Reserve may not have the capacity to cut rates much from here, whereas the European Central Bank and the Bank of England, struggling with very low economic growth, may be able to cut rates.
That may create a scenario where the euro and sterling weaken against the dollar, which could go some way to alleviating the impact of the higher costs created by those tariffs.
Outside the steel and motor sectors, equities as a whole will be concerned about inflation and growth – tariffs are bad for both. Stock markets have risen a long way in recent years, risk-free interest rates are much higher than they were.
For some investors the lesson from the first week of the Trump presidency will be simple: take some profits, put the money in the bank (or short-dated bonds) and watch from the sidelines.
Simon Edelsten is chair of the investment committee at Goshawk Asset Management