A big question for global markets is how President-elect Donald Trump, the self-described "tariff man," will enact his trade vision. His plan looks to tariffs -- against both adversaries and allies alike -- to address unfair trade practices, generate revenue, and create leverage in negotiations.
Trade experts and geopolitical strategists warn that markets might not be fully prepared for the potential longer-term ramifications, including geopolitical fallout and negative economic impacts.
While the Biden administration leaned heavily on export restrictions to curtail China's access to critical advanced technology, the Trump administration's approach could center more around tariffs. Not only has Trump long favored tariffs to deal with countries' trade surpluses with the U.S., but tariffs -- on paper at least -- offer a way to offset some of the fiscal hit from his proposed tax-cut extensions and other campaign promises that could increase the deficit.
Trump has proposed a universal tariff of 10% to 20% on all imports, and up to 25% tariffs on U.S. neighbors Mexico and Canada. As for China -- which just reported a record $1 trillion trade surplus broadly -- the president-elect wants 60% tariffs on all imports from there, possibly with other levies on top of that.
So far, markets are bracing for tariffs, though not all at once. Most investors expect the first salvo to be directed at China, but also possibly Canada and Mexico. The market consensus is levies will be used as leverage -- possibly on noneconomic issues -- to open the door to dealmaking.
But analysts caution that investors might be underestimating how long trade tensions could loom over the market.
Mixed messaging from the incoming administration is adding to the uncertainty -- and to the potential for an outsize market reaction. Some Trump advisors are pushing for a more nuanced and gradual tariff approach to soften the impact on the U.S. economy and inflation in particular. But the administration's national security hawks seem intent on reducing ties with China and broadly reshaping trade.
"In the end, if the past is any indication, the Trump administration is likely to be a one-man show and this is all about what Donald Trump decides," says Warren Maruyama, a former general counsel at the United States Trade Representative office. He is now senior counsel, focusing on international trade, at the law firm Hogan Lovells.
That is forcing scenario-planning in the market.
The Scenarios
If the new administration uses Section 301 of the Trade Act, the White House could declare China is in violation of the Phase One trade deal struck in 2020 during Trump's first term -- or withdraw from it altogether. Then Washington could increase tariffs within a couple months or expand the amount of goods subject to duties. About 60% of Chinese imports have already been subject to levies, averaging 16%.
But Henrietta Treyz, director of economic research at Veda Partners, tells Barron's the White House could skip the typical enforcement process and impose tariffs within days. The White House could also use the International Emergency Economic Powers Act, or IEEPA, giving the president wide latitude to implement tariffs almost immediately on national emergency or national security grounds.
If the White House uses both IEEPA and Section 301 to hit China with simultaneous tariffs, investors will likely be rattled.
"That will be a nasty shock to the market," Treyz says. "It suggests no off-ramp to the existing tariffs and an entirely new layer of negotiation complexities -- and a diplomatic thumb in the eye to override what existed of those [trade] negotiations in the first place."
"We should consider that material escalation of the already fraught US-China tensions," Treyz adds.
An even bigger surprise would be if the White House also pursues universal tariffs on all imports, which would likely destabilize markets even more.
For now, Solita Marcelli, chief investment officer at UBS Wealth Management, expects the Trump administration to "escalate to de-escalate."
That could mean a larger tariff threat out of the gate against Canada, Mexico, and China, to get their leaders to the table. The White House could use IEEPA to hit Canada and Mexico with duties of 5% to 25% on a range of products, including steel and aluminum. Those tariffs could potentially go into effect within 10 days, according to Treyz.
On Chinese goods, Marcelli expects a tripling of the effective tariff rate in stages, to about 30% by end of 2026 -- excluding some consumer-oriented goods, like smartphones, to limit the hit to consumers. Also possible are bilateral tariffs on imports from Europe and on goods that the U.S. already makes, like autos, which could give consumers domestic alternatives and help minimize the inflationary hit.
These paths, however, don't bode well for the U.S. or global economy.
Slapping 60% tariffs on all Chinese imports and a universal 10% tariff on other imports would add 1.6 percentage points to U.S. inflation and shave 0.3% off U.S. gross domestic product in just the first year of implementation, according to Morgan Stanley Wealth Management. In China, analysts expect Beijing to increase long-anticipated fiscal stimulus and let its currency weaken to offset the tariff hit, but TS Lombard still expects 60% tariffs to shave one percentage point off China's economic growth.
The Negotiations
Investors do see room for negotiation. Mexico could take measures at its border to control illegal immigration or fentanyl flows; Canada has a wealth of critical minerals that could offer leverage; and Europe could commit to buy U.S. defense equipment or liquefied natural gas or reduce tariffs on U.S. autos. Another route: Foreign multinationals in the tech or auto sectors could agree to build production facilities in the U.S.
The path is trickier for China, however. Though Beijing didn't buy any of the additional $200 billion in exports it pledged in the Phase One trade deal, investors still hope a deal is possible. With the world's second-largest economy still struggling and increasingly reliant on exports for growth, Chinese officials have already been in Washington to gauge what could appease the incoming administration, analysts say.
Trade experts warn the market might be too optimistic about U.S.-China negotiations, given the deterioration in relations. China's cyberattacks on critical U.S. infrastructure, increasing military aggression in the South China Sea, and ties to Iran and Russia are creating a rare bipartisan push among U.S. lawmakers to re-examine the relationship.
Meanwhile, the Biden administration's export restrictions on advanced technology has hardened China's view that the U.S. is out to constrain it. China's President Xi Jinping has doubled down on state control of the economy. His aggressive support of manufacturers has resulted in a flood of cheap electric vehicles, semiconductor chips, and other exports to the rest of the world -- even as its sales to the U.S. fall. That approach goes against the structural changes the U.S. has long sought in deals with China, including relying more on domestic demand and less on exports and creating a level playing field for foreign firms.
The Fallout
In addition to tariffs' likely negative economic impact, they will also exacerbate geopolitical tensions. Trump could possibly call on Congress to remove China's permanent normal trade relations status, which would unwind a framework that has underpinned global trade for decades. Veda's Treyz puts 40% odds on Congress following through with this later in the year -- another risk to an already fractious relationship.
Investors might also be underestimating the risk of retaliation from countries targeted by tariffs: Trade lawyers see the biggest risk to U.S. companies in sectors like agriculture, aircrafts, technology, liquid natural gas, and financial services. Treyz says Canada could retaliate with surtaxes on imported U.S. aluminum and steel, and could ban exports of uranium, copper, nickel and zinc to the U.S.
While China's pushback against tariffs has been muted in the past, it has stepped up retaliatory measures in recent months amid another wave of U.S. tech restrictions. International trade lawyers tell Barron's they are preparing companies with business in China for it to get worse: They predict Beijing will further intensify scrutiny of mergers and will increase restrictions on U.S. access to critical minerals. Other forms of reprisal could include tightening American players' access to markets China had recently opened up, like financial services.
"The markets don't understand the degree Chinese exposure is going to be a big problem for American corporations over the next four years. They are missing that a big part of the national security concerns and politics broadly carried Trump," says Nathan Picarsic, co-founder of consultancy Horizon Advisory, adding that hopes for a U.S.-China trade deal might be misplaced.
Investors will need to dig beyond the impact on industries to assess how specific companies will fare, based on their ability to get exceptions to tariffs, access to diverse sourcing, and exposure to any retaliation. Another risk from tariffs: A stronger dollar will hit firms with bigger overseas exposure.
If the incoming administration sticks with threats -- rather than implementing universal tariffs -- and signals its other tariffs are meant as leverage for potential deals, the market could see some short-term reprieve.
A trade war tit-for-tat early in Trump's first term heightened market volatility until the Phase One deal was struck. This time around, strategists caution, uncertainty over trade policy and the shifting U.S.-China relationship is likely to leave its own imprint.
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