It is hard to keep up with everything US president Donald Trump has said in the seven days since his inauguration. The 47th president is famously verbose. However, despite continuing to make tariff threats – including to Colombia over the weekend – the scale of those tariffs and the suggestion that they could be imposed from “day one” appears to have been overblown.
Markets have responded positively overall. The S&P 500 is up by almost 2% since the inauguration and reached another record high last week. The index is expected to fall when markets open later today, however that is more to do with developments in the tech sector. The FTSE 100 achieved a record high last week too.
Investors are breathing a tentative sigh of relief. It is still early days, but it looks like Trump might adopt a less aggressive stance on trade than previously indicated, using tariffs as a bargaining chip rather than imposing them indiscriminately.
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Events over the weekend seem to support this narrative, after Trump threatened to slap 25% tariffs on Colombia when president Gustavo Petro blocked two US deportation flights from landing. Colombia has since backed down and the immediate tariff threat has been suspended, for now at least.
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By contrast, the threat during the election campaign appeared to be more widespread, with Trump indicating that he would impose universal tariffs of 10-20% on all imports and up to 60% in the case of Chinese goods. Mexico, Canada and the European Union have also been the focus of much of his attention as, like China, they have large trade deficits with the US.
While Canada and Mexico have been threatened with import duties of 25% in recent days, potentially kicking in as soon as 1 February, Trump seems to have dialled down his tone on China. After the inauguration, he told the press he was considering a 10% tariff – considerably lower than the 60% suggested previously.
Speaking to Fox News in an interview that aired last week, he even went so far as to say that he would “rather not” impose tariffs on China at all, despite describing the threat as a “very big power”.
What’s behind Trump’s tariff threats?
The US is the world’s biggest importer of goods and has significant trade deficits with many countries, including those being threatened with tariffs. As of 2023 (the most recent year we have annual figures for), the five regions with the largest trade deficits with the US were China ($279.4 billion), the European Union ($208.2 billion), Mexico ($152.4 billion), Vietnam ($104.6 billion) and Germany ($83.0 billion).
Trump has been vocal about the fact that he believes this is unfair. Having a trade deficit can result in debt as a country has to borrow or sell assets to pay for imported goods. Cheaper imports can also compete with domestic goods, increasing competition and potentially reducing employment opportunities in the US.
Beyond the economics of it all, Trump has also been clear that he is prepared to use tariffs to help him get what he wants when it comes to things like illegal immigration and drug smuggling across the US border. He is often vocal about the fact that he doesn’t believe Canada and Mexico are doing enough.
What would tariffs mean for investors?
Global economies operate in a complex web of interdependence, meaning the effects of a trade war wouldn’t just be confined to the US and those economies where tariffs are imposed. Impacted countries would likely retaliate with measures of their own, exacerbating the contagion effect.
Supply chains across the world could be disrupted, with businesses reconsidering where they source their materials in an attempt to control costs. Consumers would likely feel the pain too, with businesses passing costs on in an attempt to protect their margins. A financially-stretched consumer is rarely good news for economic growth, and so the problem continues.
If Trump was to quickly introduce the tariffs threatened on the campaign trail, it could cause a “significant financial shock” here in the UK, according to Jason Hollands, managing director at the investment platform Bestinvest. “The US accounts for 15.4% of UK exports, valued at over £60 billion,” he explains.
Hollands adds that the impact on China and emerging market economies could be even more significant given how much they export to the US, potentially resulting in a devaluing of their currencies. “A worst-case scenario from a new trade war would see lower global growth and lingering inflation as the benefits of free trade and labour market mobility diminish,” he says.
Despite this, it is “widely assumed that the threat of tariffs is an opening ploy ahead of striking bilateral deals,” Hollands adds. “After all, Trump is a property mogul with a deal-maker mentality. The threat of tariffs could be used to either extract favourable concessions on US imports into other markets, or to encourage foreign firms to set up manufacturing facilities in the US to boost jobs,” he concludes.
Case study: the US car manufacturing industry
If widespread tariffs are imposed, the implications for different sectors and industries could be significant – and not necessarily positive for the US either. The car manufacturing industry is just one example that has been cited.
US car manufacturers carry out large parts of their production line in neighbouring countries. Take General Motors, for example. The company has plants in Mexico and Canada. Trump has threatened to slap both of these neighbours with 25% tariffs.
To help bring the effects of this to life, Caleb Miller, associate news editor at automotive magazine Car and Driver, runs through the production process of a Chevrolet Silverado. Chevrolet is owned by General Motors, and the Silverado was Chevrolet’s bestselling car last year. A portion of these trucks come from General Motors’ factory in Silao in Mexico, while others are built in Oshawa in Ontario.
This is just one example, but Miller says that some of Ford’s most popular and affordable models come from Mexico too, while Stellantis sources many vehicles from Canada.
The story will differ slightly from sector to sector, but multiply this effect across thousands of businesses and scores of industries and you can start to understand the potential disruption tariffs could cause. This in itself could be enough to deter Trump from imposing them in the manner initially threatened – particularly in instances where they hurt US business.
