President-elect Donald Trump has promised to impose a string of new tariffs on day one of his presidency, slapping Mexico and Canada with a 25% tariff and China with an additional 10% tariff on top of existing measures.
Together, the three countries account for around 40% of US imports, suggesting prices will rise for US consumers. Economies across the globe may also have to brace for the knock-on effect if this escalates into a full-blown trade war. Mexican president Claudia Sheinbaum has already responded to say that Mexico could retaliate with tariffs of its own.
The president-elect, who previously described “tariff” as the “most beautiful word in the dictionary”, says he would bring the measures in through an executive order. But how much freedom does the president actually have on issues like this, and can he act without the support of other branches of government?
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“The president has the power to determine and assess tariffs under many different statutes,” according to global law firm Sidley, although “most statutes require that there be some finding or determination before the president can modify or impose tariffs”.
Process requirements associated with the statutes Trump used in his first presidency (the likes of Sections 201 and 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962) meant the tariffs weren’t imposed for a year or more after the investigations were first announced.
But the experts at Sidley expect Trump to act “more swiftly” this time by using tariffs that “do not require much process”. They point to Section 338 of the Tariff Act of 1930 and Section 203 of the International Emergency Economic Powers Act.
This raises questions about what tariffs could mean for global economies and UK investors.
Will Trump’s tariffs stoke inflation?
One of the biggest concerns about Trump’s tariffs is that they could stoke the embers of inflation. The US is the world’s largest importer of goods. If tariffs are slapped onto imports and other countries respond, the cost of goods could rise significantly.
Global supply chains could also be disrupted, as businesses reconsider where they import materials from in an attempt to control costs. Again, consumers will likely feel the pain as businesses pass costs onto consumers in an attempt to protect their margins.
Global economies operate in a complex web of interdependence, meaning the effects won’t just be confined to the US and those economies where tariffs are imposed. Analysis conducted by the National Institute of Economic and Social Research (NIESR) suggests UK inflation could be 3-4 points higher over the next two years, if Trump imposes the tariffs that have been threatened.
If the tariffs announced this week against China, Mexico and Canada are at the top of Trump’s agenda, there is now an elevated risk they will be closely followed by “punishing tariffs on other countries,” says Dan Coatsworth, investment analyst at platform AJ Bell. “Trump clearly wants to make his mark and show he’s the boss,” he adds.
Coatsworth acknowledges that Trump’s tariff talk could be a negotiating tactic rather than a promise, but says the latest developments show the president-elect has “no intention of backing down for now”.
Liberal Democrat MP and Treasury spokesperson Daisy Cooper has today called on the UK government to “put forward urgent plans to Trump-proof the economy and reassure the public that we will not see the same kind of spiralling prices that we have all experienced in recent years”.
How will tariffs impact the dollar?
Opinions differ on what Trump’s tariffs could mean for the US dollar. On the one hand, trade uncertainty in Trump’s 2018-19 trade war tended to strengthen the greenback, according to Marina Valentini, global market strategist at JP Morgan, albeit other factors also had a bearing.
On the other hand, Randall Forsyth at Barron’s writes that tariffs could restrict the flow of goods and capital to and from the US, thereby reducing global use of the dollar.
Then there is inflation and interest rates to consider. If tariffs stoke the fire of inflation, it is possible rates will stay higher in the US for longer than elsewhere. In theory, this would support a stronger dollar – although the inflationary effects of tariffs would not be confined to the US alone.
For now, a lot depends on what form the tariffs take. “There remains a significant amount of uncertainty,” Valentini writes, “including whether a tariff strategy would be targeted in nature to negotiate trade terms and protect intellectual property, or used as a broad-based revenue offset for other policy items.”
Implications for investment markets
European markets felt the effects of the announcement this morning, as investors weighed up the implications for economies and businesses.
Investors are concerned that Europe “could be next in [Trump’s] crosshairs”, says Matt Britzman, senior equity analyst at Hargreaves Lansdown. “After a run of three sessions on the rise and posting its highest level in a month yesterday, [the FTSE 100] opened 0.3% lower this morning,” he adds.
Any disruption to global supply chains could increase costs for businesses and hurt investors. It comes at a time when UK businesses are already staring down the barrel of higher costs in light of the National Insurance hike announced by chancellor Rachel Reeves in the Autumn Budget.
Just as the hardships of the last few years were starting to abate, tariffs could reignite inflation and complicate the picture when it comes to interest rate cuts. This would be bad news for markets. As well as making it more expensive to borrow, higher rates keep consumer spending in check, limiting revenue growth and earnings potential.
Meanwhile, for UK investors who are heavily invested in US stocks, there are now mutterings that the so-called “Trump bump” could be coming to an end.
Tom Stevenson, investment director at Fidelity International, says future tariffs “will likely impact US consumer companies through higher input costs”. On top of this, investors have peeled back their expectations for another interest rate cut at the upcoming Federal Reserve meeting in December.
Investors will be watching closely for any further hints ahead of Trump's inauguration in January – and hoping that his bark is worse than his bite.
