- President Trump’s tariffs on Mexico and Canada have been postponed to March 1st after successful negotiations.
- US-China trade tensions continue to escalate with both countries imposing new tariffs.
- Companies like Diageo and automakers are expressing concerns about the negative impact of tariffs on their industries.
Markets continue to sway and move as tariff developments continue to filter through. President Trump followed through on his promise to impose tariffs on Mexico, Canada and China on February 1, which has seen market sentiment take a hit.
Markets are obviously concerned about the impact of a global trade war on growth while inflationary fears are also on the minds of market participants.
Is President Trump Overplaying His Hand?
There is a school of thought that President Trump may have overplayed his hand on the tariff front following retaliations by Canada while Mexico looked likely to follow suit.
However, developments since have indicated that this may be off the mark. Late in the day yesterday President Trump reached a deal with both Canada and Mexico to postpone tariffs to March 1st. This proves that President Trump may be using tariffs to get a good trade deal or in the case of Mexico, border security from the Mexican Government.
Mexican President Claudia Sheinbaum claimed she approached President Trump with a deal. The deal will see Mexico deploy some 10,000 soldiers to the US-Mexico border to stop the flow of Fentanyl and illegal migrants.
This was then followed by President Trump agreeing to suspend tariffs on Canada to March 1st as well after Canada came out with their own batch of tariffs.
The impact of this led to improved risk sentiment late in the day yesterday, however, overnight sanctions from the US on China and vice versa have kept market participants weary this morning.
US-CHINA Tariff Tit for Tat
A 10% increase in tariffs on Chinese exports started on Tuesday, but President Trump warned this is just the beginning. For Beijing, it adds to a big challenge, figuring out when to take action to boost weak spending at home.
Shortly after the U.S. tariffs started, China responded by starting an antitrust investigation into Google (NASDAQ: GOOGL ) and adding new tariffs up to 15% on U.S. coal, gas, farm equipment, oil, and more. Overall, China’s response seems mild, which analysts call a smart strategy. If talks fail, the impact on China’s struggling economy should still be manageable. The implications for China could lead to lower GDP growth of between 0.3%-0.5% based on estimates with UBS analysts favoring 0.5%.
It appears that from China’s perspective they may wish to start trade talks by focusing on “fixing” the Phase One deal from 2020. That deal, which stopped the tariff battle, required China to buy $200 billion more in U.S. goods, but it didn’t keep that promise. A strict White House is unlikely to reward China for trying to meet old commitments now.
The U.S. may push for bigger compromises, possibly beyond trade. For example, they could ask China to help end Russia’s war in Ukraine. This might also benefit China since it could open doors for Chinese companies to invest more easily in Europe.
For now though the uncertainty between two of the world's largest economies is impacting risk sentiment to some degree US equities resumed their slide today in premarket trade with the S&P 500 down around 0.7% at the time of writing.
Companies Concerns Grow as Diageo Withdraw Medium-Term Outlook
Diageo dropped its sales growth goal on Tuesday, saying that weak demand and uncertainty over U.S. tariffs have forced the spirits industry to make major changes.
This comes after the automotive industry warned of the impacts of tariffs. Given that the U.S. sells far more new cars than it builds, and its car supply chains rely heavily on global connections. Tariffs on imports would quickly raise costs and push up prices with some automakers suggesting potential increases of up to $3000.
Looking at the numbers, the U.S. imports over a third of the cars and trucks it sells, with major automakers like General Motors (NYSE: GM ), Ford (NYSE: F ), and Stellantis (NYSE: STLA ) operating in the U.S., Mexico, and Canada. Mexico has quickly become the largest supplier, exporting nearly $140 billion worth of vehicles and parts in 2024, with Canada also ranking among the top partners.
The president of Global Automakers of Canada highlights the deep connection between the U.S. and Canada, noting that they are not only each other’s largest trading partners but also closely collaborate in manufacturing, especially in the automotive industry. This unique partnership underscores the significant impact any changes in trade or policy could have on both economies.
Final Thoughts
Moving forward we might see the pool of countries sanctioned grow wider. However, if the deal with Mexico and Canada is anything to go by then it tells us that President Trump seeks to secure better deals for the US.
Does this mean the potential ‘trade war’ may end soon? This is a possibility if countries are able to strike deals with the Trump administration. If fears persist however and more tariffs are announced, we could see some sustained US Dollar strength as well as a rise in haven demand.
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