Donald Trump imposed a 25% tariff on goods coming into the US from Canada and Mexico yesterday (3 March), as well as an additional 10% tax on Chinese imports.
This was met with immediate retaliation from Canada, which matched Trump with a 25% tariffs on goods imported from the US.
Likewise, China said it would enforce retaliatory tariffs of between 10% to 15% on US imports. Mexican officials also said they intend to launch countermeasures.
And with Trump yet to follow through with tariffs he vowed to impose on other parts of the world, Quilter Investors investment strategist Lindsay James said these moves “sharply escalate the risk of an all-out global trade war between America and the rest of the world”.
Markets reacted negatively to the news, with the Nasdaq Composite index falling 2.6% yesterday.
James said Trump is willing to stomach some short-term negativity in stockmarkets, but may witness further downgrades if he goes ahead with wider tariffs.
“Whether investors will continue to believe that Trump sees the stockmarket as a barometer of his success will be sorely tested,” she added. “With a four-year time horizon before the next election, short-term weakness can no doubt be stomached by the White House.
“However, in effectively blackmailing companies to bring manufacturing onshore he is making it a dangerous and high stakes move, with retaliation and lower growth the clearest outcomes in a highly uncertain world.”
Trump retracted his threats of tariffs previously after reaching agreements with Canada and Mexico, but appears to have surprised markets by backtracking, according to Russ Mould, investment director at AJ Bell.
Markets reacted poorly to Trump’s last bout of tariffs in 2018, which was muted by intervention from the Federal Reserve – something investors may be banking on again this time around.
Mould said: “Financial markets had assumed that Trump would talk tough on tariffs and back off when he got a deal, so the US president’s plan to act first and then (perhaps) talk has come as a nasty surprise to share prices around the world, especially as Canada and Mexico have already threatened retaliation. Trump’s launch of tariffs in 2018 did raise revenues for America but US corporate profits took a hit that year and America’s S&P 500 index fell by a fifth, so markets have understandably taken fright this time around.
“One big hope is that the tariffs do not last, while another is that the US Federal Reserve helps out with some interest rate cuts, something for which Trump is already calling. Rate cuts in 2019 did help get the S&P 500 on track [and then more QE and more reductions in the headline cost of borrowing in response to Covid 19 provided a torrent of cheap liquidity which markets thoroughly welcomed].”