The White House has re-imposed tariffs on steel and aluminum imports from Canada, Mexico and the European Union, effective 1 June. The decision was criticized by the targeted nations, with Canada and Mexico enacting countermeasures, and several European countries warning they would do so soon. We believe the actual macroeconomic impact of the tariffs will be small, since they apply to less than 2% of total US imports.
However, from a big-picture perspective, the tariffs raise concerns about the economic and market outlook:
- While there has been no official announcement, it appears that prospects for reaching a deal on NAFTA in the near term have faded. In our view, enactment of an updated NAFTA is now unlikely before 2019.
- Earlier this week, the White House said that a final list of USD 50bn worth of Chinese imports to be hit with 25% tariffs will be announced by 15 June, with the tariffs to take effect "shortly thereafter." This came only days after Treasury Secretary Steve Mnuchin said that a trade war with China was "on hold.”
- With inflation already at the Fed's 2% target and signs that the labor market is starting to overheat, anything that adds to inflationary pressure is unwelcome. Previous tariffs have already pushed up the prices of steel, aluminum, and lumber. While not our base case, there is a risk that inflation could eventually rise beyond the Fed's tolerance limit, triggering more rapid rate hikes.
We remain optimistic that trade deals will eventually be reached that would actually improve the status quo. However, should negotiations stall and the US respond to the retaliatory tariffs with a second round of tariffs, we would become more worried about the risks of a full-blown trade war.
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