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Dow Jones NewsFeb 3, 7:48 PM UTC
DJ Is the Trade War Already Over? A Look at How Policy Could Unfold. -- Barrons.com
By Reshma Kapadia
The trade war may be on hold before it even began in earnest.
On Monday, President Donald Trump announced a one-month pause on tariffs against Mexico and said he plans to talk with Canadian Prime Minister Justin Trudeau this afternoon.
Analysts stress that it is important not to read too much into a possible about-face. The Mexico news came just days after the Trump administration announced wider-than-anticipated tariffs of 25% against its North American trading partners, and 10% against China, on national-security grounds related to fentanyl and illegal migration.
Trump's Saturday orders ignited concerns not only about the sector-by-sector effects of imposing tariffs on countries that account for 40% of all U.S. imports in areas such as autos, agriculture, but also the potential damage to consumers. The levies have the potential to raise the cost of housing and groceries.
Going into the weekend, markets had expected Trump's dealmaking tendencies to prevail, which is a reason the tariff news sent stocks lower early on Monday. But the S&P 500 retraced most of its earlier losses following a Trump post on Truth Social about his "friendly conversation" with President Claudia Sheinbaum, who agreed to supply 10,000 Mexican soldiers to stop the northward flow of fentanyl and illegal migration, and to work with Trump's team to achieve a deal.
The takeaway for markets: Prepare for some volatility in coming months as the Trump administration builds up its staff and a more nuanced, but more aggressive, trade policy is hashed out.
"There will be higher bark than bite, but it isn't going to be that it's no bite," said Sarah Bianchi, a political affairs and policy strategist at Evercore ISI and former deputy U.S. Trade Representative. She expects tariffs to end up higher.
Tariffs are central to the administration's policy priorities: reducing the country's trade deficit, bringing back manufacturing to the U.S. and addressing a host of national security issues. They also would raise revenue to offset the extension of Trump's 2017 tax cut, which he promised on the campaign trail.
Brian Gardner, Stifel's chief Washington policy strategist, told Barron's the risk of a trade war in this administration is higher than it was in Trump's first term. He still expects universal tariffs and more actions against China, even if there is some rollback in the current round.
"The blunt instrument crowd has the upper hand," said Gardner, who sees the weekend's trade salvos as driven by more hawkish members of the administration, such as Peter Navarro, senior counselor for trade and manufacturing, and Stephen Miller, deputy chief of policy. A more nuanced approach is likely to emerge once Commerce Secretary nominee Howard Lutnick and U.S. Trade Representative nominee Jamieson Greer, who helped with the trade battle in the first administration, are confirmed, Gardner said.
With the tariffs announced over the weekend much broader than many anticipated, especially with 10% tariffs on Canada's energy imports, Veda Partners' Henrietta Treyz sees room for Trump "to scale back and appear tempered, even if some level of tariffs go into effect."
Steps to ratchet things down could include excluding energy entirely from the Canada tariffs, and including carve-outs of highly integrated industries, such as the auto sector, if the tariffs on Mexico appear likely to take effect. Canada's path to a deal may be complicated by nationalism, on display over the weekend, and the country's own political divisions, Bianchi said.
China, meanwhile, has been preparing proposals to ease the tensions for months, leaving the door open to some dealmaking on the 10% tariff related to fentanyl. Trump has said he wants to meet with Chinese leader Xi Jinping and analysts see possible interim deals on noneconomic fronts, including the sale of TikTok and help with the Russia-Ukraine war.
Regardless of this back and forth, analysts stress that the tariff risk isn't going to evaporate. Most still expect a universal tariff, hitting all imports, that could be phased in slowly to get as high as 20%.
In a note to clients, Citi equity strategist Scott Chrombert noted that the House Ways & Means Committee included baseline tariffs as a revenue- raising option as they put out a menu of budget options. "The staying power for baseline tariffs is more sincere than negotiating tariffs in our view, particularly if codified in law through Congress," he wrote.
One way to map out where policy may go is to look at what the administration wants from various countries, and then to consider how they may respond. The issues Trump has raised with Europe, from the region not buying enough U.S. gas, potentially imposing reciprocal tariffs on U.S. autos, and not paying enough for NATO, could offer insight into potential areas of dealmaking, though Bianchi says Europe is hamstrung a bit because it is divided politically.
China has been trying to scenario-plan for a while. The 10% tariffs Trump has ordered on all imports from China, on top of those already in place, would shave about 0.6% off China's gross domestic product this year, according to TS Lombard.
Regardless of the recent tariff news, Beijing has been trying to stabilize its economy, which is suffering from a crisis in the housing market and has become increasingly reliant on exports in the past eight years. That is one reason Chinese officials have been eager to find a way to strike a deal.
Possibly under consideration, says Andy Rothman, a veteran China analyst who founded the research firm Sinology and has met with Chinese officials, are proposals to voluntarily constrain exports on things like electric vehicles and batteries, and to build manufacturing in the U.S. Even a one-off revaluation of the renminbi is a potential option.
But the growing number of China hawks in the administration intent on reducing ties with a country they see as America's chief strategic and military rival will keep the pressure on China. More tariffs are likely as the administration completes a review of China trade issues Trump has requested. The deadline is April 1.
In a note to clients before the pause on tariffs against Mexico, Yung-Yu Ma, chief investment officer at BMO Wealth Management, recommended clients not rush to make big moves. He said the initial back and forth on tariffs was likely a template for the negotiations to come.
"Be patient and opportunistic; there may be a time to be aggressive, but it isn't upon us yet," he said. "President Donald Trump may be willing to let the U.S. take considerable economic pain in an attempt to achieve his stated goals of reducing trade deficits, bringing jobs to the U.S., and enhancing border security."
Write to Reshma Kapadia at reshma.kapadia@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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February 03, 2025 14:48 ET (19:48 GMT)
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