Trump's wager on tariffs: potential effects on policy and market responses
In the realm of global trade, the administration of US President Donald Trump continues to make waves with its tariff strategy. Here's a breakdown of the key points:
Trump has signalled his intention to reintroduce tariffs on steel and aluminium, setting them at a flat rate of 25%, effective from March 4th. This move, however, is not just about trade. It's a bargaining tool for non-trade issues such as immigration and drug enforcement, particularly with Canada and Mexico.
The tariff strategy also echoes policies from Trump's first term, reflecting a broader trade confrontation, notably with China. However, the potential escalation of sanctions could push more trade flows outside the Western banking system, strengthening the trend of de-dollarisation.
Oil imports from Canada, through pipelines, make any reduction in imports detrimental to both economies. Sanctions, on the other hand, pose a greater risk of market disruption compared to tariffs. Fears of wider tariff implications have triggered pre-emptive purchases, affecting even non-target metals such as copper.
Market volatility has increased due to these policy signals, but there is widespread scepticism regarding energy tariffs on Canada. The mere threat of tariffs has unsettled commodities markets, with traders on COMEX locking in pre-tariff prices.
The tariff threat has had limited impact on overall prices, particularly for oil and gas. However, the LME, which operates on physical deliveries, has seen sustained disruption due to the tariff threat.
In an attempt to boost US natural gas exports, Trump may seek to leverage EU energy security concerns. Meanwhile, achieving self-sufficiency in aluminium, as intended by the proposed 25% tariff, would require six times the energy used by all US data centres and could take up to five years. Given the uncertainty of future administrations continuing this policy and the likelihood of passing higher costs onto consumers, tariffs on Canadian aluminium remain unlikely.
It's important to note that the Countering America's Adversaries Through Sanction Act (CAATSA) requires congressional backing. Efforts to negotiate a ceasefire in Ukraine could present an opportunity to ease some energy sanctions imposed on Russia in 2022.
The trend of de-dollarisation is increasing, with non-Western economies increasing gold reserves and settling trades outside the dollar system. If Trump escalates sanctions, he risks further fueling this trend.
In a bid to maintain US financial dominance, Trump may prioritise easing restrictions over escalating them. This approach could help minimise market disruptions and the potential backlash from global trading partners.
In a recent webinar of the ETNR Industry Group, which involves the U.S. Chamber of Commerce, discussions revolved around the USA's position in global trade policy. As the situation unfolds, it's clear that the US trade policy under Trump continues to shape the global trade landscape in significant ways.
