Investors across the financial world are weighing the impact of escalating trade war concerns after China’s retaliatory tariffs on the US, even after President Donald Trump agreed to pause tariffs on Canada and Mexico.
Trump has long spoken against the high trade deficit with Canada, Mexico and China that together stands at more than $480bn.
He has also ramped up his tariff threats to the European Union.
Scott Bessent, Trump’s treasury secretary, provided clues about how his boss might employ new tariffs during his confirmation hearing in early January.
Bessent, a former hedge fund manager who helped his former boss George Soros bet against the currencies of other countries, told senators that people should expect Trump to use tariffs in three ways: to remedy unfair trade practices (which Trump has said would revitalise American industry); to raise revenue for the federal budget (important to help pay for Trump’s plans to extend his 2017 tax cuts), and to use as a lever in negotiations with foreign powers in place of sanctions, which Trump believes have been overused.
Trump has talked about using tariffs to revitalise local manufacturing and stop the US getting “ripped off” by other countries due to trade imbalances.
He’s floated the idea of using a mix of tariffs and incentives such as expedited permitting approval as a way to entice companies to build their facilities in the US.
During his first presidency, he imposed several rounds of tariffs on Chinese goods, the impacts of which are still being assessed.
Income from tariffs could help pay for the tax cuts promised by Trump. He wants to extend reductions in income taxes that were approved in 2017 during his first presidency, many of which are due to expire at the end of 2025.
He’s even floated proposals for expanding these tax breaks, for example by exempting tips and social security earnings from taxation. He also aims to slash the corporate tax rate to 15% from 21%.
These measures are expected to lead to a loss in government revenue of $4.6tn over 10 years. Trump’s tariff hikes, if implemented in full, could bring in as much as $2.5tn to $3tn over that same period of time, according to Bessent.
Trump has also become sceptical of sanctions because they drive other countries away from the dollar, and sees tariffs as a way to gain leverage in negotiations, according to Bessent.
Trump’s brief January standoff with Colombia — in which he threatened to impose tariffs over repatriation flights for undocumented migrants — provided a glimpse of Trump’s strategy.
For a few hours, it seemed that a trade war between the US and one of its closest allies in Latin America was inevitable.
Then Trump pulled back on his threat after an agreement was reached between the two countries.
Trade between China and the US – the world’s two largest economies – is vast, totalling more than $530bn in the first 11 months of 2024, according to Washington.
Over that same period, sales of Chinese goods to the US totalled more than $400bn, second only to Mexico.
According to the Peterson Institute of International Economics, China is the dominant supplier of goods from electronics and electrical machinery to textiles and clothing.
But a yawning trade imbalance – $270.4bn for January to November last year – has long raised hackles in Washington.
In February 2019, the Federal Reserve Bank of San Francisco estimated that the tariffs were adding 0.1 percentage point to US consumer price inflation and 0.4 percentage point to a metric that measures the costs for businesses to invest.
Trump said on Sunday the sweeping tariffs that he has imposed on Mexico, Canada and China may cause “some pain” for Americans, as Wall Street and the largest US trading partners signalled hope that the trade war would not last long.
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