By The first trading day of February saw global equity markets slump as investors reacted to President Trump’s latest tariff threats.
These were aimed at the US’s closest neighbours: Mexico to the south and Canada to the north.
It’s not as if the 25% tariffs on Mexican and Canadian US exports (or 10% on Canadian oil) came out of the blue.
Mr Trump touted his love of tariffs throughout his election campaign, and he made it clear after his inauguration on 20th January that these specific tariffs would kick in at the beginning of February.
While the US dollar fell sharply on inauguration day after the new president initially dismissed tariffs as not a ‘Day One’ issue, it bounced back after he insisted that 25% tariffs on Canada and Mexico would trigger on 1st February.
Yet it looks as if the consensus view was that Trump’s tariff threat was simply a negotiating tactic, and he’d never dream of following through on them.
But that ignored two issues: firstly, the tariff threat would never work as a negotiating tactic unless Trump could convince everyone that he’d use it. Secondly, he’s done it before.
He imposed steep tariffs on Chinese imports during his first term as president, and the Biden administration raised them towards the end of last year.
As it turned out, this time around both Mexico and Canada got a last-minute stay of execution, with tariffs postponed for 30 days.
The reason given for this munificence was promises from both countries to ramp up their respective border protections, ostensibly to try and prevent the flow of fentanyl and illegal immigrants into the US.
In return, President Trump has promised to clamp down on arms being trafficked from the US to Mexico.
Taken all together, Trump will view his tariff policy as an undoubted success.
Bear in mind that Colombia reversed its initial decision not to accept several plane-loads of deportees from the US after a levy threat.
Next target: the Eurozone perhaps. There was no such reprieve for China. Trump imposed an additional 10% tariff on Chinese imports, starting on 4th February.
China promptly retaliated with tariffs on US imports, with 15% on coal and liquefied natural gas, and 10% on other goods including autos, farm equipment and crude oil, starting on 10th February.
In addition, China has promised an antitrust probe into Google and said it will impose export controls on rare earth metals.
During his first term as president, Trump had railed against China’s unfair trade practices.
He went on to impose tariffs in 2018, reducing them after China made specific promises over trade.
But Trump has focused on fentanyl this time around. That’s a trickier issue in some ways, although both sides could avoid further tariffs and give ground without losing face by promising specific actions.
Because this is serious. If this latest round of tariffs were fully implemented, they would work out about five times the size of the 2018 ones.
There were also stacks of exemptions the first time around, and it remains to be seen if that could be repeated now.
One thing is for sure, tariffs lead to a stronger US dollar, and that’s not good for US competitiveness on the world stage, or for US debtors.
Mr Trump wants lower interest rates (although he backed the Fed’s decision at the end of January not to cut further at this time) and it’s likely he favours a weaker dollar for trade reasons.
But he also warned the US public that things would get worse before they got (much) better. And so they have already, in a way.
As far as investors are concerned, stock indices have had two big shocks in a row: DeepSeek at the end of January and tariffs in Feb.
Both events didn’t come out of nowhere, yet the market reactions certainly did.
This suggests that investors are getting nervous.
That’s not to say that stock indices can’t rally further.
But it’s certainly a warning for bullish investors to take extra care.
(David Morrison is a Senior Market Analyst at Trade Nation. Views are his own.)
The post Well, that escalated quickly appeared first on Invezz
