New Trump tariff threats rekindle investor concerns about trade and timelines
The EU and Mexico have been threatened with a 30% rate
GLOBAL investors got a harsh reminder of the risks around trade tariffs and US President Donald Trump’s deal-making on Saturday (Jul 12), after he threatened fresh tariffs on his biggest trading partners in Europe and Mexico.
Trump said in social media posts on Saturday he would impose a 30 per cent tariff on imports from Mexico and the European Union starting on Aug 1.
The announcement comes after weeks of talks with key US trading allies that failed to reach a more comprehensive trade deal. It also follows a week marked by heightened trade tensions, after Trump issued new tariff announcements for a number of other countries, including Japan, South Korea, Canada and Brazil, as well as a 50 per cent tariff on copper.
‘Escalate to de-escalate’
The EU had hoped to reach a comprehensive trade agreement with the US, but Trump’s letter punctured the recent optimism in Brussels over the prospects for an 11th-hour agreement between the major economies.
He did, however, leave an opening for additional adjustments.
“If you wish to open your heretofore closed trading market to the United States, and eliminate your tariff, and non-tariff, policy and trade barriers, we will, perhaps, consider an adjustment to this letter,” Trump wrote.
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European Commission President Ursula von der Leyen said the bloc “took note” of Trump’s letter and warned that such a move would damage both economies. The bloc’s ambassadors are scheduled to meet Sunday to discuss the trade situation.
“We remain ready to continue working towards an agreement by Aug 1,” von der Leyen said in a statement. “At the same time, we will take all necessary steps to safeguard EU interests, including the adoption of proportionate countermeasures if required.”
Three EU officials told Reuters on Saturday that Trump’s 30 per cent tariff threat is a negotiating tactic.
Michael Brown, a senior market strategist at Pepperstone in London, said it seemed to be a “escalate to de-escalate” strategy by Trump, aimed at getting trading partners to negotiate and extract concessions.
The EU had been facing the threat of US tariffs at 50 per cent on its steel and aluminium exports, 25 per cent on cars and car parts, and 10 per cent on most other products. The US had also been looking into further tariffs on pharmaceuticals and semiconductors.
Brown said the risk was that the EU takes the new tariffs poorly and announces countermeasures that escalate trade tensions to levels in early April, when markets were whipsawed by Trump’s initial “Liberation Day” tariffs.
“Depending on what happens in the next 24 hours or so, I imagine that the knee-jerk move is euro-negative, eurozone asset-negative,” he said. “And then, as calmer heads prevail, it comes back to the fact that, is it just a negotiating gambit?”
Despite some modest rockiness this week, the benchmark S&P 500 ended down just 0.3 per cent on the week, not far from record-high levels.
European stocks took a slight hit on Friday as markets waited for the promised letter on tariffs. The pan-European Stoxx 600 index lost 1 per cent and snapped a four-day winning streak, clocking its biggest single-day decline in over three months.
Mexico has more to lose, given that the US is its largest export market, and the economy is already feeling the impact of the uncertainty over trade.
In his letter to Mexican President Claudia Sheinbaum, Trump said the country has been “helping me secure the border”, but added that it was not enough.
Trump added that if Mexico “is successful in challenging the cartels and stopping the flow of fentanyl”, the US would consider adjusting the levies.
“These tariffs may be modified, upward or downward, depending on our relationship with your country,” he added.
The letter is silent on whether the US will preserve a carve-out for goods traded under the United States-Mexico-Canada Agreement, which have been exempt from the current 25 per cent rate. The administration has said it will keep the exemption for Canada.
‘Moment of capitulation’
US stocks have rebounded after plunging in April following Trump’s announcement of sweeping global tariffs. Trump had paused many of those steep tariffs, but issued new levies this week with an Aug 1 date for them to go into effect.
The CBOE Volatility Index, Wall Street’s “fear gauge”, closed on Thursday at 15.78, its lowest closing level in nearly five months, although it moved back above 16 on Friday.
Karl Schamotta, chief market strategist at payments company Corpay in Toronto, said the stream of tariff announcements could reignite market concerns.
“At some point soon, it will become clear that Trump’s protectionist agenda has not been appropriately discounted in currencies, in asset prices, or in measures of volatility,” he said.
“A moment of capitulation is coming, in financial markets, or in the White House itself.”
While markets are less sensitive to headlines than a few months ago, Citi strategist Scott Chronert said in a note on Friday that “we will need some positive trade developments by the White House’s Aug 1 deadline to hold recent equity market gains”.
The current weighted average tariff in the US is about 16 per cent, up from 2.5 per cent at the start of the year, UBS economists said on Friday. That would rise to about 18 per cent, including the country tariffs announced in this week’s letters.
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