Macro Update (Tariffs)

Recent/upcoming developments… The Trump administration’s tariff policy remains unsettled, but there are a number of dynamics that are clear… (a) President Trump continues to emphasize in interviews and discussions with Congressional Republicans that tariffs are a central part of his economic agenda, (b) he wants to impose broad-based “universal” tariffs, particularly related to certain national-security sensitive products, while also using tariffs as a negotiating tool with China, Mexico, Canada, and Europe on non-trade-related issues, but (c) his advisors are split on how to carry out his tariff agenda, and he hasn’t made a decision on how to proceed.

* The White House released a memo on his first day in office that calls for a comprehensive assessment by 4/1 from USTR, and the Departments of Commerce, Treasury, State, and Homeland Security on how various trade tools could be used to raise tariffs, while Trump has repeatedly said, including as a key point of emphasis in his speech at the House Republican planning retreat this week, that he intends to impose a 25% tariff on Mexico and Canada, starting this Saturday, 2/1 related to his concerns about border security and fentanyl.  While Mexico’s President Sheinbaum and Canadian PM Trudeau have said they are prepared to retaliate, they are also engaging with Trump on the issues of concern, particularly in the case of Mexico on border security, something which White House Press Secretary Leavitt highlighted this week.

* Trump has also threatened a 10% tariff on China to address fentanyl shipments, but not as frequently, nor as directly as he has with the other countries.  He has separately highlighted his phone call with President Xi and invited Chinese officials to his inauguration, and said that he just wants a “fair” trading relationship with China.  He has also related his desire to strike a deal on divestment of TikTok’s U.S. operations to his tariff policy with China.

* Trump has repeatedly emphasized his interest in broad-based “universal” tariffs while his advisors are continuing to deliberate over how this action should be structured.  Trade hawks such as his senior advisor Peter Navarro, Deputy Chief of Staff Stephen Miller, USTR nominee Jamieson Greer, as well as incoming Commerce Secretary Lutnick, are advocating for a more expansive approach, whereas Treasury Secretary Bessent and NEC Director Hassett are proposing ways to move forward in a more economically-sensitive manner.  Meanwhile, Congressional Republicans, particularly those from farm states, continue to express concern about the potential disruption that broad-based tariffs could cause.

* Some advisors are proposing a narrower focus on sensitive products, including those with a national security focus, such as semiconductors; defense-sector inputs, such as steel, iron, aluminum and copper; pharmaceutical materials; and clean tech inputs, such as batteries, critical minerals and solar panels.  Trump has in the last week highlighted his interest in tariffs on semiconductors, defense-related inputs, and pharmaceuticals.  These product categories have been mentioned by China hawks in Congress over the last couple of years, and even been the focus of attention of national security officials during the Biden administration.

* Reports indicate Treasury Secretary Bessent is proposing a 2.5% universal tariff that would increase monthly up to Trump’s proposed 20% level.  White House Press Secretary Leavitt subsequently said Trump feels 2.5% is too low.  NEC Director Hassett has reportedly advocated for a similar gradual escalation, starting at 5%.

Our outlook… The 4/1 deadline for Trump’s tariff memo reflects the fact that his team does not have a fully developed plan on how to carry out his tariff agenda.  He and his team will presumably require additional time to consider how to move forward after the memo is released, pushing comprehensive tariff actions into ~May/June or later.  In the meantime, Trump appears very eager to act and is likely to take some more targeted tariff actions, largely focused non-trade related issues.  It’s our expectation that he’ll announce tariffs on Mexico and Canada this weekend, related to his concerns about border security and fentanyl, but as occurred in his first term with Mexico, the tariffs are unlikely to go into effect for a couple of weeks.  China remains at risk of having tariffs imposed, but among the more notable observations in the last few weeks is that Trump appears to taking a more measured approach to China on trade policy than other countries, and that it appears he’s eager strike a broader deal with China, involving compliance with his first term “Phase One” purchasing commitments and other issues such as TikTok.  We assume these countries will announce visible steps to address his concerns (with slightly more confidence regarding Mexico rather than Canada), putting the probability of tariffs going into effect at 40%.  Meanwhile, our expectation is that the administration will ultimately impose some set of “universal” tariffs, which is reinforced by the fact that Bessent and Hassett, his most economy-sensitive advisors, are developing plans on how to implement them, not (at least in a visible way) fighting the idea of imposing them.  The most likely scenario is that universal tariffs are targeted at the product categories that he and his advisors have recently highlighted.

Watch for these developments… We are watching for indications that Mexico and Canada are prepared to take additional visible steps to address border security and fentanyl shipments, as this will be the primary factor in determining whether they can avoid having tariffs imposed.  As we saw repeatedly in Trump’s first term, the optimal outcome for him will be to look like he’s forced these countries to act on his key priorities, while avoiding any material disruption to U.S. industries.  On the broader question of universal tariffs, we’re continuing to watch for how much push-back is emanating from farm-state Republicans, and any additional signs that a more product-specific approach would satisfy Trump.