Washington Weekly: Tariff Frenzy

The Senate confirmed five of President Trump’s nominees, including Chris Wright to serve as Energy Secretary, former Georgia Congressman Doug Collins to serve as Veterans Affairs Secretary, Pam Bondi to serve as Attorney General, Scott Turner to serve as Housing and Urban Development Secretary and Russell Vought to serve again as director of the White House Office of Management and Budget. The House passed a bill to permanently classify fentanyl-related substances as Schedule I controlled drugs (see below) and a bill to prohibit a moratorium on the use of hydraulic fracturing unless authorized by Congress.

The Senate will continue to confirm Trump administration nominees. The House will vote on a bill to allow Congress to overturn multiple regulations issued in the last year of a president’s term.

Tariff Frenzy.

Last weekend, President Trump announced higher US tariff levels on imported goods from Canada, Mexico and China. Following separate negotiations with Canada and Mexico earlier this week, he paused the tariffs on these countries until March 1. The higher tariffs on Chinese goods have gone into effect, but they could be subject to a pause after President Trump speaks with Chinese President Xi next week. As expected, these countries responded with reciprocal tariffs on US goods. Even various Canadian provinces – outside of the national government – were prepared to add extra tariffs on US goods entering those areas. So, how does the tariff activity proceed from here? Tariff threats will continue as long as Trump is president since he believes it is his ultimate source of leverage in negotiations with individual countries. We believe the higher tariffs with Canada and Mexico will continue to be paused for the months ahead and that any pause with China will require a longer-term deal that will have to be negotiated between the two presidents over time.

China is Different.

Most trade and China experts in Washington didn’t expect new US tariffs on China to be announced in the first few weeks of the Trump second term. There was an expectation that Trump would negotiate a deal with the Chinese following a meeting between the two presidents in the spring or summer. We still believe this is the Trump plan, and that the tariff announcement this week was designed to give him leverage in advance of those talks. He needed to back up his tough tariff talk with action before negotiations.

Next Shoe to Drop.

President Trump has hinted of plans to apply higher tariffs on a wide range of goods from the European Union on or around February 18. Goods covered would likely include steel, aluminum, copper and pharmaceuticals, among others. The EU has threatened retaliation. These negotiations between longtime allies will generate significant media coverage. They also will be intense and personal since there appears to be a lot of animosity and skepticism between Trump and EU leaders. This fight will soon be triggered in public and both sides will drive a tough bargain.

Will Trump Relent?

Probably not. He has won several positive concessions from other countries over the last week because of the tariff threats. Why stop? If he sees data in the weeks and months ahead on significant adverse inflationary or market impacts, he could pull back. He knows he won the election in part because of voters’ concerns over high inflation, and he doesn’t want to be saddled with that problem. Also, we all know he is a keen watcher of the markets and if they suffer because of the tariff activity, he will consider pulling back.

Elon Musk Focus.

As Elon Musk works at President Trump’s request to make recommendations to improve government efficiencies through the newly created Department of Government Efficiency (DOGE), it is inevitable that he will butt heads with federal workers and others as he scrutinizes their work. DOGE’s final recommendations aren’t due until July 2026, so we should expect a spirited and loud exchange between Musk and his antagonists for a long time. Democratic lawmakers have especially taken aim at the controversial Musk, knowing that his approval rating is low with voters. Attacking Musk instead of Trump may resonate more with voters, or at least that is the premise they are testing. Democrats tried this guilt-by-association approach in the election by tying Trump to the controversial Project 2025, which didn’t seem to work. Musk will punch back, as is his nature, and the fight will go on. Musk and Democratic lawmakers are effectively opening the national debate over federal spending cuts and a downsizing of government, but that debate may be overshadowed by personalities going forward.

Sovereign Wealth Fund.

President Trump this week signed an executive order that directs his administration to work on the development of a sovereign wealth fund (SWF), sometimes referred to as a government-owned investment fund. While there are many different types of SWFs, a common model is using excess foreign currency reserves or revenues from oil or other natural resources to help diversify the economy and/or government revenues. Various US states have SWFs, though the federal government does not. While there have been success stories (e.g. Norway has SWFs that essentially are pension funds for its citizens), other global SWFs have suffered from opacity and corruption. The Trump EO begets more questions than it answers. It’s not clear that there is legal authority to create a new SWF or to try to repurpose some other government entity. There also are questions about how it would be structured, governed and funded (through new tariffs?) and what would be its strategic purpose (Trump suggested it could buy TikTok). Despite the appeal of an SWF for Trump, it’s hard to see one getting off the ground anytime without action from Congress.

Crypto Bills.

The Republican chairs of relevant congressional committees and President Trump’s “crypto czar” this week had a public show of force to underscore their interest in advancing crypto legislation into law. They are focused on two major bills. The first, which passed the House last Congress, would set the line between digital assets that are securities (and therefore under the SEC’s authority) and that are commodities (and therefore under the CFTC’s authority). The other would establish a regulatory framework for stablecoins (digital assets issued by private entities but backed by assets including fiat currencies like the dollar). Forging consensus will be challenging. On stablecoins, there is debate about the level of federal regulatory oversight. More broadly, there is debate about the application of anti-money laundering requirements to often decentralized digital assets. While there is bipartisan interest in establishing regulatory rules for digital assets, advancing either into law will not be easy or fast and once again could be sidetracked by disagreements on the all-important details.

The Middle East.

President Trump’s first phone call to a foreign leader in his second term was to Saudi Crown Prince Mohammed bin Salman. He had his first 1:1 meeting this week with Israeli Prime Minister Benjamin Netanyahu. He also issued an executive order on Iran’s nuclear weapon capacities and indicated that the US may want to play a role in occupying or managing post-war Gaza. There is a lot to unpack here, but we expect Trump to be very involved in discussions over the ongoing war, a potential Saudi-Israel normalization and a peace plan for the region. The odd announcement on Gaza this week has been partially walked back, but we believe the intent was to draw attention to US impatience with a solution for the region and to suggest a shocking plan that would prompt more urgency among Middle East leaders to agree on its own plan.

Fighting Fentanyl.

The House this week passed a bill that would permanently classify any illicit fentanyl or fentanyl-related substances as Schedule I substances, the highest restricted classification under the Controlled Substance Act. The bill would bolster law enforcement capabilities to prosecute and close loopholes that let traffickers alter chemical structures to evade certain controls. The rise of illicit fentanyl use in the US has led to 62,000 opioid overdose deaths (primarily fentanyl related) from August 2023 to July 2024. It also is the leading cause of death among adults 18-49 (more than cancer and car accidents). Alongside the House bill, the Senate introduced a similar bill this week with bipartisan support. Ultimately, this legislation likely will pass both chambers and measures to combat fentanyl will accelerate as it remains a top priority for the Trump administration and Congress.

Retaliatory Taxes.

We recently discussed resistance from President Trump and Republican lawmakers to a global minimum tax that is being adopted in South Korea, Australia, Canada and several countries in Europe. The Trump administration is now considering using a longstanding and overlooked law (Section 891 of the Internal Revenue Code) that allows the President, at his sole discretion, to double the US tax rate for citizens and corporations from a foreign country if it is determined that the country is subjecting US citizens or companies to discriminatory taxes. The law has never been used, but the Trump administration has instructed Treasury Secretary Scott Bessent to review this provision and assess its potential application, possibly for trade disputes as well. CEOs of companies from foreign countries that have adopted the global minimum tax should be on alert to this development.

GOP Enthusiasm.

Last week, Florida conducted Congressional primary elections for two special elections that will be held on April 1. The ruby red districts saw strong turnout on the Republican side compared to past special election primaries. While the GOP nominees are bound to keep these seats, the increased enthusiasm is an early indication of how Republican voters view the early days of President Trump’s second term. The nominees, Jimmy Patronis (FL-1) and Randy Fine (FL-6), each received an early endorsement from Trump, which helped them each win by over 55%. The constant headlines and daily activity emerging from the President’s executive actions seem to be bolstering his popularity among Republican voters in at least these two districts. Trump’s continued ability to play kingmaker in Republican primary elections will make Republicans in Congress wary of crossing him.