Opinion

Trump’s new tariff actions: a wakeup call to global markets

by Adam S. Posen for Peterson Institute For International Economics (PIIE).

President Donald Trump’s plan to impose a 5 percent tariff on all imported goods from Mexico beginning June 10 raises a danger to the US and global economies well beyond his tariff measures to date. This should be a wakeup call to financial markets.

Newsletter sign up

Threatening Mexico with a tariff over the migration issue—despite the overall trade agreement in the United States-Mexico-Canada Agreement (USMCA)—marks a turning point. If tariffs can be raised by unilateral presidential decree, linked to border policy not the economic relationship, markets will realize that the president is not going to deliver a trade deal with either China or Mexico. By weaponizing tariffs, Trump makes evident that he is driven in trade policy by his ideological and perhaps political agenda rather than any tactics to improve US bargaining leverage.

Trump’s announcement of a 5 percent tariff hike, and a vow to “gradually increase” tariffs until the flow of undocumented immigrants across the border has stopped, has already led to a widespread selloff the day of his announcement (May 31, 2019). Yes, there have been multiple selloffs through the last couple of years on trade threats from the administration, usually promptly reversed. I believe this one is different. Juxtaposed with China’s announcement that it had made up a list of “unreliable” foreign companies potentially to be treated like the United States is treating Huawei, the latest tariff action by the White House tells markets that developments are not entirely under Trump’s control to pull back. Risk of escalation has become real.

One omen of the danger, suggesting that the latest selloff is different from previous cases, shows up in the flow of investments into German government securities (Bunds) and the rise of euro’s value in financial markets seen today. Safe-haven flows to government bonds when the US government threatens tariffs are normal, but usually they are primarily into US Treasuries and away from those economies exposed to trade risk. That even some of the safe-haven flows are going into Bunds and the euro, away from Treasuries/dollars, strongly suggests that concerns about the US economy are rising. This is more striking, given that the Trump migration-linked tariffs will particularly harm the auto sector, and similar tariffs could be weaponized against the European Union, too.

Piie

It also means that no government will want to make a deal with the United States at all. The Trump administration claims it still wants to reach a trade accord with China, for example. But if you are the Chinese negotiators, your logical reaction to this latest action would be: “Why should I even bother talking to this administration?” The idea that tariffs against Mexico driven by a rationale to stop immigration could be separated from trade negotiations in the minds of foreign governments is risible. Of course, Trump’s tariff announcement now largely wipes out the possibility of ratification of USMCA.

Until now, financial markets have been asleep to the consequences of Trump’s trade policies, despite warnings from experts in many places, including the Peterson Institute for International Economics (PIIE). Markets have been in denial, comforted by the thought that Trump’s protectionism was directed only against China, or was all just well-controlled negotiating tactics. They can no longer be so complacent.

Read More

Are you enjoying the article? Join our community for even more!

 

Click Here

Related posts

Trump’s mini war with India

Debora Knight

Farm states need expedited resolution to U.S.-China trade fight

Camila Coutinho

Don’t blame China for unraveling US-Europe relations

Camila Coutinho

Leave a Comment