Investors are struggling to price in the long-term threat posed by Donald Trump’s trade tariffs after the President launched punitive charges on US allies over the weekend before delaying the measures.
Markets suffered a bruising sell-off on Monday after Trump announced 25 per cent tariffs on Canada and Mexico before staging a recovery when he struck a deal to delay the charges by a month.
While Trump’s North American trading partners secured a last-minute reprieve, tariffs on goods arriving from China came into force on Monday.
The world’s second largest economy soon announced a series of retaliatory measures on Tuesday.
Jim Reid, head of research at Deutsche Bank said: “The past few days have raised ongoing questions over Trump’s tariff policy plans”.
The size of the sell-off on Monday prompted many analysts to argue that markets had under-priced the potential for Trump’s idiosyncratic trade policy to cause disruption.
However, the subsequent delay to the tariffs prompted others to argue that the prospect of a global trade war was minimal, since tariffs were largely a negotiating tool.
For analysts at Royal Bank of Canada, the key question was whether tariffs are “just a threat to deliver concessions” or if they will be “semi-permanent”.
Most commentators argued that the barrage of tariff news indicated that Trump was largely using tariffs as a negotiating technique to extract concessions.
“Markets need to follow a rationale, and we think the conclusion is that Trump is ready to bluff his way into transactional victories, whether on border security or trade,” Francesco Pesole, an FX analyst at ING said.
Michael Brown, senior research strategist at Pepperstone, said that Trump was not actually seeking to tackle the US’ trade imbalances, which would imply more permanent measures.
“In reality, tariffs appear to have little-to-nothing to do with trade agreements, or narrowing the US trade deficit, whatever pretences might be thrown around,” he said.
Mohit Kumar, an analyst at Jefferies, maintained that tariffs will “end up not as bad as feared”.
But Trump is likely to continue threatening major action against many of the US’s largest trading partners to secure concessions in areas of interest.
Speaking to reporters yesterday Trump said tariffs were a “very powerful” tool, both for strengthening the economy and “getting everything else you want”.
The European Union is likely to be the next target, after Trump described the EU’s trade policy as an “atrocity” earlier in the week and confirmed that tariffs would be put in place “pretty soon”.
Whatever Trump’s longer-term ambitions, analysts agreed that markets were in for a period of significant volatility.
“With tariffs being arguably the strongest economic tool that is almost fully at the President’s discretion, we should surely expect that these will continue to be used to both create negotiating leverage and pursue different objectives such as supply security, revenue generation and trade deficit reduction,” Reid said.
Despite arguing that the tariffs would likely prove to be short-term measures, RBC analysts warned that markets were vulnerable if their assumption was wrong.
“If tariffs are here to stay, the current market pricing leaves quite some room for repricing,” they said.