It has been another busy week dominated by news from the US president thanks to the imposition – now delayed – of punitive tariffs on Canada and Mexico, and tariffs on China that have gone ahead
Heightened policy uncertainty around trade was joined by heightened geopolitical uncertainty as Donald Trump proposed a controversial solution to the rebuilding of the Gaza Strip, which has been largely destroyed during the Israel-Hamas conflict that is currently in the first phase of a ceasefire.
Last weekend the US announced 25% tariffs on imports from Canada and Mexico (excluding Canadian energy exports, which were to to be taxed at 10%), along with additional 10% tariffs on China. The tariffs were to be implemented under the International Emergency Economic Powers Act, due to a “national emergency” around the “extraordinary threat posed by illegal aliens and drugs, including deadly fentanyl”. This act gives the President powers to enact such measures without having to consult Congress. Trump also said tariffs on the EU “will definitely happen” and “it’s going to be pretty soon”. Canada immediately responded with 25% tariffs on $109 billon of US goods, $20 billion of which would be implemented immediately with the remainder in three weeks. Canadian prime minister, Justin Trudeau, said, “We don’t want to be here, we didn’t ask for this … but we will not back down in standing up for Canadians.” Mexican president, Claudia Sheinbaum, also said retaliation would follow.
Markets were somewhat sceptical that the punitive tariffs would proceed, although we still saw significant volatility in the Canadian dollar and Mexican peso. Equity market volatility remained subdued, with the belief that there was scope for a climbdown. With Trump scheduling calls with both Trudeau and Sheinbaum, there was a prevailing view the tariffs would be delayed for further negotiations. Following those calls the tariffs were pushed back by 30 days. Sheinbaum agreed to supply 10,000 Mexican troops to the Mexico-US border, which Trump said “will be specifically designated to stop the flow of fentanyl and illegal migrants to our country”. He added, “l look forward to participating in negotiations with President Sheinbaum, as we attempt to achieve a ‘deal’ between our two countries”. Trudeau, meanwhile, announced additional steps on top of an existing $900 million border plan. Trump said the delay would be used “to see whether or not a final economic deal with Canada can be structured”. The tariffs were delayed to 4 March to allow a month of “negotiations” to take place.
Trump has taken the US to what appeared to be the brink of a major trade war with two supposed economic allies, bound by the USMCA (US, Mexico, Canada) trade agreement, which replaced the NAFTA trade accord during Trump’s first term in office. While the US has for now stepped back from imposing such punitive tariffs, it is clear that Trump will continue to use such policies to pressure other countries, with his motivations not necessarily driven by trade deficits, but rather issues such as illegal migration and drug trafficking. Combined, China, Mexico and Canada make up around 40% of US imports totalling $1.35 trillion. In Trump’s first term in office the administration targeted ‘only’ $350 billion of Chinese goods. This week’s actions appeared to be politically motivated, but whatever the reason the tariffs have the potential for severe economic consequences if (and it’s still an ‘if’) they are implemented. Mexico and Canada both send more than three-quarters of their exports to the US, underpinned by the trade agreement signed by Trump in 2018. Both countries would likely fall into recession should the tariffs be implemented, while there would be a negative impact on US growth and inflation. However, this would be difficult to quantify given likely mitigation in terms of lower demand, costs being absorbed by lower margins and the shift of production of goods over time to the US. The pause means adjustments to growth and inflation expectations can also be put on hold, but the continued uncertainty will weigh on corporate decisions. For companies wishing to avoid such consequences, the allure of shifting production to US soil will continue.
China celebrated the Lunar New Year holiday at the start of the week, so their response has been muted. Likewise, Chinese equity markets saw no major volatility. As the country returned from holidays on Wednesday, the government response stepped up. Foreign Ministry spokesman Lin Jian noted their “resolute opposition” to US tariffs on Chinese exports and called for “fair and mutually respectful dialogue and consultations”. China also responded with additional tariffs on US goods, along with more aggressive anti-trust investigations into some of the largest US tech names including Alphabet and Apple. China’s retaliatory tariffs will begin on 10 February. The White House says Trump is due to speak to China’s president, Xi Jinping, in the next few days so we will see if there is scope for rapprochement.
If trade uncertainty wasn’t enough, Trump also delivered some geopolitical uncertainty in the aftermath of his meeting with Israeli prime minister, Benjamin Netanyahu, by telling a press conference the US will ‘take over’ the Gaza Strip and that Palestinians in the enclave would be ‘resettled’. Trump said “the US will take over the Gaza Strip, and we will do a job with it, too. We’ll own it and be responsible for dismantling all of the dangerous unexploded bombs and other weapons on the site.” Asked if the US would send troops to Gaza, Trump said “we’ll do what is necessary … we’re going to take over that place, we’re going to develop it, we’re going to create thousands of thousands of jobs and it’ll be something that the entire Middle East can be very proud of.” He added that he imagined Gaza could be “the Riviera of the Middle East”. The rebuilding of the region, where 70% of all buildings have been destroyed during the Israel-Hamas conflict, is a huge task. However, the forced displacement of Palestinians not only breaks international law, but is also an extremely long way from the usual political view taken by Western allies, which have long supported a two-state solution to the conflict between Israel and Palestine. The move has also been rejected by Saudi Arabia, who noted they ‘will not establish diplomatic relations with Israel’ without a Palestinian state. Egypt and Jordan also condemned Trump’s suggestion that they would accept Palestinians displaced from Gaza.
After all that, writing about the Bank of England meeting feels like a welcome dose of normality. As expected, the Monetary Policy Committee cut interest rates by 25 basis points to 4.5%. There were two votes in the MPC for a 50 basis point cut. The Bank also cut their growth forecast for 2025 to just 0.75%, down from the 1.5% forecast in November, and increased their forecast for inflation. They now expect CPI to reach 3.7% in the third quarter of the year thanks to higher energy prices. Despite the expected pick-up in inflation over the coming months, governor, Andrew Bailey, described this as a “bump in the road” arguing that they expect “to be able to cut bank rate further as the disinflation process continues” and would “judge meeting by meeting how far and how fast”. Bailey pushed back on the notion the UK is in a period of “stagflation” saying they expected GDP to pick up from the middle of the year. All the same, with the economy set to see significantly slower growth, and inflation remaining well above target, life is not going to get easier for the chancellor any time soon, with the OBR also likely to make significant cuts to their growth forecast of 2% growth for the UK in 2025.
It is not simple to draw conclusions from this week’s tariff and geopolitical noise. Trump 2.0 is delivering on the campaign promises, with decisive action and threats against both economic and political friends and foes. Taking lessons from Trump’s first term are important – often it’s best to wait and see rather than taking his comments at face value and making swift investment decisions based on them. Trump’s actions last weekend immediately brought leaders to the table and he will see this as a ‘win’. But Canada and Mexico have actually made very limited concessions to convince Trump to delay the tariffs, and how the next month unfolds will determine if we find ourselves on the brink once again. This episode gives weight to the argument that Trump is using tariffs, on his economic allies at least, more for negotiation than to raise revenues. Arguably it’s a different story as far as China is concerned.
I hope those that follow it enjoy another weekend of Six Nations rugby. DeepSeek correctly called the games for France and Ireland last week. This week I’ve given ChatGPT a go – and it’s gone with France to beat England and Ireland to beat Scotland, and thinks Italy versus Wales “could go either way”. Useful insight there! After a shocker in Paris, hopefully Wales can bounce back for the Italy game in what has become (depressingly) our most important match this tournament!
Source: Columbia Threadneedle Investments 07 February 2025
