Tariffs at 10% have been imposed on China
Tariffs have arrived but so far only China has pushed back with its own tariffs while others targeted are hoping to calm the waters and are seeking to find a way through the dispute. Even then, China’s response has been relatively mild, even if wide-ranging, which suggests that the country would like to avoid a full-scale trade war if it can.
The story so far. President Trump recently threatened to impose tariffs on a range of countries to achieve his goal of an improved US trade balance with those other countries, on the grounds that they had been taking advantage of American consumers and running big trade deficits with the US. That put everyone on notice that some changes were definitely coming.
Canada, Mexico and China were the first to be named but no doubt Trump and his advisors have a few more countries on the list for the future firing line. The European Union has also been mentioned as a target for future tariffs although no figures for the prospective tariffs have been disclosed. We can probably assume that levels around 25% may be quoted – particularly as Trump has called the EU’s trade policy “an atrocity”. The UK got off relatively lightly with Trump hinting that things might be worked out (I recall that Trump 45 was very pleased to have met the Queen – I’m not sure the reverse was entirely true – but let’s hope that Trump 47 remains in a good mood and the Buckingham Palace meeting was indeed a good investment of time and diplomacy).
Unlike China, the imposition of tariffs on Canada and Mexico has been postponed for a month
Tariffs on Canada and Mexico were duly announced on February 3rd and then postponed for a month after President Trump’s phone calls with Canada’s Trudeau and Mexico’s Claudia Sheinbaum about some of the US grievances. It seems that Mexico will take tougher steps to curb illegal migration across the southern border from Mexico to the US – that may be sufficient for Trump to be willing to close a deal, declare victory and move on. In reality it is hard to see just how much President Trump got from the confrontation – for example, there are no new troops in Mexico, just the redeployment of existing forces while in Canada there look to be a few more Border Patrol officers assigned from existing staff and the appointment of a “fentanyl czar”. It can certainly be dressed up as achieving things that had not been achieved before – as long as it’s not subject to too much careful scrutiny – and President Trump can claim that he got a smart deal on drugs and migration. But the level of tension was probably unnecessary – a little like a TV show with the need to maintain its ratings with a dramatic ending every week.
However, things are more confrontational with China. Despite Trump’s plans for a reduced level of tariffs on imports from China, just 10% – recognizing the size and importance of the economic relationship – when President Trump did impose tariffs on the country on February 4th, China immediately imposed retaliatory tariffs on US energy imports: 15% on all US imports of coal and LNG and 10% on all oil imports as well as an export ban on rare earths. Suggesting that the disagreements may go on for some time but may not necessarily escalate, China said that it would file a lawsuit at the WTO and may revisit antitrust investigations against US tech companies, perhaps seeking to use these measures as leverage against the US pressure.
It seems likely that China is not going to take President Trump’s pressure lying down but will also seek to avoid unnecessary economic conflict. On the other hand, its own response to the tariffs suggest that it sees no point in escalating the situation at the moment until further discussions have taken place and may well be pragmatically interested in negotiating a deal further down the line. China does of course have a $1 trillion trade surplus, with around one-third of that surplus being directly attributable to the US. President Trump is clearly not unaware of the issue and I think we can expect him to address it before long.
Tariffs became reality very quickly
To discuss tariffs in a bit more detail. President Trump said that he would impose 25% tariffs on Mexico and Canada (with a reduced 10% rate on imports of Canadian crude) from February 4th, and an unspecified level of tariffs on the EU at a later date. He also announced that a 10% tariff would be imposed on all imports from China. Trump claims that the tariffs will reduce the trade imbalance between the US and the countries being subjected to tariff barriers and that the US will be “very rich and very strong” as a result.
Economists might disagree, instead seeing the costs imposed on American consumers in the form of higher prices for imported goods as a negative overall for the US economy and a factor that could prevent interest rates coming down as quickly as they might otherwise have done. The President has noted that tariffs may eventually be extended to chips (the silicon kind), energy and metals as well as pharmaceuticals. This is likely to be a story that will run and run as President Trump’s views develop and we will no doubt return to it as his plans become reality.
American business interests expressed disquiet about the tariffs imposed, understanding that US exports would probably suffer similar tariffs, which has now already happened in the case of China. Apart from also noting that the imposition of tariffs would not solve the fentanyl and border crises, American executives for their part highlighted that these actions would only serve to increase their costs and were concerned that the actual imposition of tariffs could have a negative impact on inflation, which damaged Joe Biden’s standing as President when it surged during his term of office and which Trump will not want to get the blame for.
The “frictionless” economy that has developed across North America has without a doubt been extremely beneficial for the three countries concerned, enabling a regional view to be taken for investment, collaboration and development, with some commentators suggesting the impact will be a $200 bn hit to the North American economy. The imposition of the new tariffs will, therefore, be a substantial change to the region’s economy that had been growing until this week.
What could perhaps have a greater impact on America’s thinking about the use and effectiveness of US tariffs is if it caused a sharp selloff in domestic equities or bonds which could flow through to impact the savings of American consumers and families – that would not be a popular outcome for anybody. So there are constraints on what can be done given the potential impact on financial markets and the flow-through to how consumers view the real economy.
Domestic issues remain important concerns.
We’ll always have Paris?
One thing that President Trump did not wait around to do was to withdraw the United States from the Paris climate accord. As soon as ex-President Biden had left, President Trump announced that the US would withdraw from the Paris Accord (for the second time) – the one and only country ever to do so. While clearly attractive to President Trump’s base, the move is likely to have a longer-term negative impact on global emissions and may also leave the US behind the curve when it comes to issues of global leadership on climate issues.
Can US democracy survive a second Trump term?
Taking all of this together, it is clear that the question which the FT asked recently – whether US democracy will survive a second Trump term – is both very relevant and vital to the success of western interests. It’s too early to say, in my view. There are certainly unusual pressures on it as a concept in the current political environment, but we have seen the American republic successfully fight back against many perceived threats with the price of liberty being eternal vigilance.
Only time will tell.
This article has been approved by Tideway Investment Partners LLP; however, the views and opinions expressed in the article are not necessarily the views and opinions of Tideway.
The content of this document is for information purposes only and should not be construed as financial advice. We always recommend that you seek professional regulated financial advice before investing.
About the Author
Stephen O’Sullivan was an ‘anchor’ client in the founding of Tideway and has been a client of James Baxter since 1999.
Stephen began his oil & gas career as an oil trader, economist and Asian corporate planner in the downstream and trading divisions of BP. He then spent several years with the upstream and gas divisions of Total, working with natural gas, NGLs, shipping, pipeline management and the Sullom Voe oil terminal. In 1989 he joined Coopers & Lybrand as a Senior Strategy Consultant in the oil & gas consulting team, working on the privatisation and restructuring of the energy sectors across emerging markets as well as on both sides of the nuclear sector. He lived and worked in China, Russia, Central Asia, Eastern Europe, Southern Africa and the Middle East in this period.
In 1995, he was appointed Head of Research and Oil & Gas Analyst at MC Securities in London – an Emerging Europe-focused investment bank, where his team was consistently number 1 ranked in EMEA oil & gas research. Following the sale of MC Securities to JP Morgan in 1998, he moved to Moscow as a Partner and Head of Research at United Financial Group, Russia’s leading independent investment bank, where he and his team were ranked the number 1 oil & gas research team and the number 1 Russia country team for nine years in a row.
After the sale of UFG to Deutsche Bank in 2005, Stephen became Head of EMEA and Latin American Research for Deutsche Bank where his research team was ranked the number 1 team across all the industry sectors, in both strategy and in economics, in country research for Russia & South Africa and across the entire EMEA region in 2006 and 2007. In 2007 he left Moscow and moved to Hong Kong as Head of Asian Research for Australia’s Macquarie Bank. In 2009 he joined Barclays Capital in Hong Kong to lead the build-out of the bank’s Asia ex-Japan equity research business.
Since 2013 he has been an investor in a range of businesses in technology, real estate and materials while living in Hong Kong. His major interests include China’s gas sector reform, China’s nuclear renaissance and the country’s global impact on energy markets. While based in Hong Kong he has also been a Senior Visiting Research Fellow at the Oxford Institute for Energy Studies, the world’s number 1 ranked energy think tank. At Oxford he published several major studies of the Chinese energy sector.
He is a contributing author to several international think tanks on global energy issues and has advised international law firms on the oil and gas sector globally.
