The historic 25% tariff on imports from Canada and Mexico into the US came into effect immediately Tuesday as Commerce secretary Howard Lutnick suggested that the policy could soften. Hours later, Donald Trump told Congress that tariffs “protect the soul of our nation.”
They say they want to kill you, but that’s uncertainty as investors try to understand the Trump administration’s economic policies.
The president has promised a new “golden age,” but more skeptical analysts are starting to warn him of the risk of “Trump breakdowns.”
Not only has the president embarked on an extraordinary trade clash with his neighbours, he has also urged retaliatory tariffs from Canada and prompted a rapid price warning from US retailers on everything from avocados to cars, but this conflict comes amidst the backdrop of corrosive instability.
As Trump’s right-hander Elon Musk works to dismantle the federal bureaucracy, tariffs are repeated, accompanied by measures against the EU.
The direct impact of layoffs made so far by Musk’s “Government Efficiency” (DOGE) appears to be relatively small, but the fast and split approach that appears to involve ripping contracts and pushing employment law boundaries underscores a sense of confusion.
As Mike Masnick, a US journalist who used similar tactics in the tech industry, put it on his TechDirt blog on Wednesday, investors who want Trump’s policies to be pro-business are “learning very expensive lessons about the difference between creative destruction and simple destruction.”
It is also unclear how much pressure Trump will put on the independent Federal Reserve for lower interest rates.
These and other concerns include questions about how the president will fund Jumbo’s tax cuts plan – which appears to have recently surprised the US stock market.
The US is not a less open economy (for example, according to World Bank data, trade was worth 24% of GDP in 2023, versus 64% in the UK, for example).
However, it could have a greater impact if businesses become more cautious about spending due to a typical climate of uncertainty.
For example, in the latest supply management report on manufacturing, respondents repeatedly mentioned the lack of clarity surrounding surrounding tariffs. As one transport company said, “Customers are suspending new orders as a result of uncertainty about tariffs. There is no clear direction from the administration as to how managers will implement it, so it is difficult to predict how it will affect businesses.”
U.S. consumer confidence recorded its sharpest monthly decline since August 2021 last month, in the headlines on tariffs leading to price increases, according to the long-term conference committee index.
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In the UK, Prime Minister Rachel Reeves said that even if Trump exempts Britain from tariffs, the UK economy will be hurt by the G7 trade war.
The swirling fear of a potential US recession also appears to be heavy on the dollar. Economists usually attenuate rising import costs, expecting that tariffs will strengthen the currency. And global volatility usually favors safe haven currency.
However, greenbacks have been declining in foreign exchange despite tariffs and market fear factors. This led the economists to ask what they thought was an unthinkable question until recently. Can US currency lose its status as a global reserve currency?
Trump could still be pulled back from the brink of tariffs in exchange for concessions from Mexico and Canada, and could quietly shelve plans to punish the EU. But his overall tricks have calmed the market.
Until recently, many investors were committed to a bright narrative of “US exceptionalism,” hoping that the president’s plan for tax cuts and deregulation would widen the boom driving US technology. The exceptionalism Trump provided is not the kind they were looking for.
