In the four weeks since Donald Trump assumed office one thing is clear: Namely, he is testing the limitations of U.S. presidential powers more than any U.S. leader since Franklin D. Roosevelt.
The most important action on the economic front is the tariffs Trump announced with Mexico, Canada and China at the beginning of this month. It has fueled considerable uncertainty about Trump’s ultimate intentions. After stating that nothing could deter him from imposing duties of 25 percent on Mexico and Canada, he agreed to delay their implementation for a month in return for these countries providing added border security.
Amid this, there are two camps about what this development means. The optimists are investors who believe Trump’s trade threats are mainly a bargaining ploy, while the pessimists include economists who warn that they pose a threat to the global economy.
My take is that Trump is setting the stage for a much broader implementation of tariffs, and the opening salvo was a trial balloon before the real negotiations about trade begin.
Trump began this week announcing he would impose 25 percent tariffs on all steel and aluminum imports. This was followed by an announcement that he would also impose reciprocal tariffs, whereby the U.S. would match the duties foreign countries place on U.S. goods. Senior aid Peter Navarro said the measures would also take into account non-tariff barriers in the calculations.
Meanwhile, there are several takeaways that can be gleaned from the initial round of negotiations.
First, Trump is the first president to use the International Economic Powers Act to impose tariffs, and it will likely trigger lengthy legal battles that will test the limits of a president’s executive power.
Previously, presidents, including Joe Biden, used the law to impose economic sanctions on other countries, including on Russia after it invaded Ukraine in 2022. So why did Trump use tariffs rather than sanctions when he declared a national emergency about “the major threat of illegal aliens and deadly drugs killing our citizens, including fentanyl?”
I believe he did so for two reasons. One is that the International Economic Powers Act gave him latitude to implement across-the-board tariffs compared with trade legislation, which would require specific violations to be enumerated. Another reason is that one of Trump’s goals is to demonstrate his commitment to curb illegal immigration, and the implementation of the act was a means to do so.
Nonetheless, it is hard to see how it could justify tariffs of 25 percent on Canada, considering illegal immigration and shipments of fentanyl from it are minimal. Canada is also the country most adversely affected by the duties on steel and aluminum. This leaves many observers mystified as to what Canada has done to deserve such treatment.
Second, America’s trading partners are prepared to retaliate, albeit in a measured way.
Prior to the announcement of tariffs, most investors considered Canada and Mexico to be in weak bargaining positions because more than three-quarters of their exports go to the U.S. However, Canada was swift to announce that it would impose 25 percent duties on imports from the U.S. of more than $100 billion, and Mexico indicated it would do so if the U.S. tariffs went into effect.
When agreements were reached with both countries to delay the implementation of tariffs in exchange for stronger border security, officials for the Trump administration hailed them as important concessions. However, several news sources pointed out that the purported concessions already were in effect.
This has left some observers wondering whether President Trump backed off because he was concerned about the consequences that higher tariffs would have on U.S. consumers. While Trump’s motives are unclear, Canada, Mexico, China and the European Union appear willing to take targeted actions against the U.S., but they do not want the trade conflict to escalate.
Third, financial markets took the news in stride.
Another uncertainty was how financial markets would respond to the announcement of tariffs. The evidence here is clear. While global equity markets sold off on the news, they rallied when Mexico and Canada received a 30-day reprieve, and they did not sell off materially when 10 percent tariffs on China went into effect.
Many investors are convinced Trump’s motive is to extract concessions from America’s trading partners despite his denials. Some market participants have gone further in asserting there is a “Trump put” that will protect them in the event the stock market sells off materially. Their logic is that Trump treats the stock market as an approval indicator, and he would back off in the event of a large selloff. He agreed to a pause with China in mid-2019 when the U.S. stock market was jittery and at one point fell by 15 percent.
Fourth, trade issues will be the focus of the next round of negotiations.
Assuming Mexico and Canada satisfy Trump’s concerns about border issues, the upcoming meetings will consider steps they are prepared to take to reduce their bilateral trade surpluses with the U.S., which Trump views as an indication of unfair trade practices.
The challenge Trump faces is that the overall U.S. trade deficit has increased from about $800 billion in 2017 to a record $1.2 trillion last year. Although the bilateral deficit with China has narrowed since Trump imposed duties in his first term, it has been more than offset by increased deficits with Mexico, Canada, the European Union and other countries.
Moreover, the U.S. trade deficit appears set to increase further as a result of the strong dollar, which is nearing its highest level since the mid-1980s, and solid economic growth that will pull in imports.
The bottom line is that the goal of reducing the U.S. trade imbalance will be very difficult to attain.
Consequently, it is premature to conclude that the risk of a global trade conflict has diminished. What makes it especially hard to predict the outcome is that President Trump is transactional rather than strategic, and even he does not know what the final outcome will be.
Nicholas Sargen, Ph.D. is an economic consultant for Fort Washington Investment Advisors and is affiliated with the University of Virginia’s Darden School of Business. He has authored three books, including “Investing in the Trump Era: How Economic Policies Impact Financial Markets.”
