Macro update tariffs (Mexico, Canada, China, Europe, other)

Recent/upcoming developments… The 25% tariffs imposed by President Trump on Mexico and Canada were suspended for 30 days after he had calls with Mexican President Sheinbaum and Canadian PM Trudeau.  Meanwhile, China has put in place retaliatory tariffs in reaction to the 10% tariffs imposed by Trump.  Trump and Chinese President Xi are apparently scheduling a call for some time in the coming days.  While the focus of Trump’s action in the last few days has been on Mexico, Canada, and China, he has repeatedly indicated that he is planning a broader set of tariffs on a set of sensitive products (e.g., steel/aluminum, copper, pharmaceutical inputs, semiconductors, with reports suggesting clean tech inputs are also potentially at risk as well).  Trump has also recently escalated his criticism of the U.S. trade deficit with Europe, implying that he plans to use tariffs to address that issue as well.

* On Saturday, Trump signed Executive Orders (EOs) imposing a 25% tariff on imports from Canada, other than energy products, upon which a 10% tariff is imposed.  He also imposed a 25% tariff on imports from Mexico, and a 10% tariff on imports from China.  In addition, he revoked the de minimis exemption (duty free imports for shipments under $800) for these countries.  The tariffs are being imposed in response to the threat of illegal immigration, as well as shipments of fentanyl and other drugs into the U.S.  Trudeau announced in response that retaliatory tariffs of 25% on $105b worth of U.S. imports, while Sheinbaum said her government would retaliate with tariff and non-tariff measures.

* On Monday, Trump held calls with Trudeau and Sheinbaum, during which they agreed to take visible steps to respond to Trump’s concerns about border security and fentanyl.  Trump subsequently announced that tariffs on Mexican and Canadian imports will be suspended for 30 days.  He noted that Secretaries Rubio and Bessent as well as his nominee for Commerce Secretary, Howard Lutnick will commence negotiations with Mexico on an unspecified issue set, while he implied that during the coming month, he will try to reach an “Economic deal” with Canada.

* Trump characterized the tariffs on China as an “opening salvo” and implied they could be increased, saying “if we can’t make a deal with China, then the tariffs will be very, very substantial.”  China did not signal any willingness to concede in the way Mexico and Canada did.  Instead, they imposed a 15% tariff on imports of U.S. coal and LNG, and 10% on oil, agricultural machinery and other products.  They also imposed export controls on tungsten and other critical minerals, restricted Calvin Klein and Illumina’s business operations, and launched an antitrust investigation into Google.  Peter Navarro, Trump’s senior counselor for trade policy, implied today that the 10% tariffs announced by Trump this weekend are subject to negotiation, and that the pre-existing Sec. 301 tariffs imposed on China in Trump’s first term and later modified by the Biden administration, may also been modified.

* Leading up to Trump’s tariff actions, the U.S. auto, agriculture, oil/gas industry, as well as various unions (e.g., Steelworkers, UAW) called for exemptions, a request to which senior White House advisors (e.g., Chief of Staff Susie Wiles) were apparently receptive.  In addition, key advisors, including Treasury Secretary Bessent, and even Trump’s hawkish Deputy Chief of Staff Stephen Miller, urged caution on the tariffs on Mexico.  But, Trump himself decided to take a more maximalist approach by imposing the tariffs immediately and not allowing for exemptions.

* Key Republicans, such as Senate Majority Leader Thune (R-SD), Agriculture Committee Chair Boozman (R-AR), among numerous others, expressed concern about across-the-board tariffs, and argued for them to be more targeted in nature.  However, they did have not specifically criticized Trump’s actions this weekend, and even key champions for farmers (e.g., Sen. Grassley (R-IA)) conceded that Trump is delivering on what he promised during the campaign.

Our outlook… There is only a 20% probability that the recently announced 25% tariffs will ultimately be imposed on Mexico, given that the issues in play (i.e., border, fentanyl) are well defined and on which Mexico has made visible concessions to Trump that provide him a sufficient “win.”  There is a 30% probability that the recently announced 10% tariffs will ultimately be imposed on China, given that the issues in play are only somewhat defined (i.e., fentanyl, unfulfilled 2020 commitments to buy U.S. goods), and involve a more complex negotiation.  There is a 40% probability that the recently announced 25% tariffs will ultimately be imposed on Canada, which is elevated because Trump is framing his concerns there around a less well-defined and harder to address “economic deal.”  There is a 40% probability that across-the-board tariffs are imposed on Europe, given that the issues (e.g., trade deficit, NATO) are not well defined and to the extent they are trade-related, are difficult to resolve.  There is a 60% probability that tariffs are imposed on sensitive products (i.e., steel, aluminum, copper, pharmaceutical inputs, clean tech inputs).

* China is reportedly preparing for a negotiation with Trump that is focused on both addressing fentanyl shipments and meeting the requirements of the “Phase One” trade deal struck in Trump’s first term.  China has apparently only meet ~60% of commitments to purchase U.S. goods required by that deal.

* Coming into the trade actions of the last few days, various members of Trump’s team, including Commerce Secretary nominee Lutnick, made positive comments about steps being taken by Mexico on border security.  There have been some, but notably fewer, positive comments about Canada’s efforts.  In addition, Trump has repeatedly expressed concern about the U.S. trade deficit with Canada, though not Mexico.  His desire for an “economic deal” with Canada is not defined.  There are a number of long-standing trade tensions with Canada, including regarding lumber, dairy, digital trade, but Trump is likely going to want to focus on a broader issue set.  It’s possible that a deal could focus on addressing the lack of reciprocity in certain areas (e.g., auto tariffs – a sector on which he’s repeatedly focused), or Trump could call for Canada to make purchasing commitments as he did in his first term with China.

* Trump and others on his team (e.g., VP Vance) have in the past tied tariff threats against Europe to various countries’ failure to meet their NATO defense spending commitments.  So, addressing this issue would help avoid imposition of tariffs.  Trump could also call for Europe to address the lack of tariff reciprocity in certain areas (e.g., auto tariffs, particularly in Germany – a sector on which he’s repeatedly focused), or he could call for Europe to commit to purchasing U.S. goods as he’s done with China.  Trump has begun to hint at the latter issue by referencing European purchases of U.S. natural gas.  Separately, Republicans have expressed concern about the global tax regime being advocated by Europe and they/Trump have expressed concern about the related taxes imposed on U.S. tech firms.  Addressing these concerns could be part of a deal.

Watch for these developments…  The primary dynamic we are watching with Mexico, Canada and China as negotiations get underway, are the issues that Trump’s team prioritizes.  The more easily resolvable these issues are, the lower the probability will be that tariffs will ultimately be imposed.  Tactical issues such as border/fentanyl are more easily resolved than are structural trade issues.