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How will Trump’s tariffs impact investors?

Pabio November 27, 2024

President-elect Donald Trump promised to impose a series of new tariffs on the first day of his presidency, imposing a 25% tariff on Mexico and Canada and an additional 10% tariff on China on top of existing measures.

Together, these three countries account for about 40% of U.S. imports, suggesting prices will rise for U.S. consumers. Economies around the world may also need to prepare for the repercussions if this escalates into a full-blown crisis. trade war. Mexican President Claudia Sheinbaum has already responded by saying Mexico could retaliate with tariffs of its own.

The president-elect, who previously described the term “tariff” as “the most beautiful word in the dictionary,” said he would introduce the measures through an executive order. But how much freedom does the president really have on issues like this, and can he act without the support of other branches of government?

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“The President has the authority to determine and assess rates under many different laws,” according to the international law firm Sidley, although “most laws require that there be a finding or determination before that the President may modify or impose tariffs.”

Process requirements associated with laws used by Trump during his first presidency (such as Sections 201 and 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962) meant that tariffs were not imposed until a year or more later. the investigations were first announced.

But Sidley’s experts expect Trump to act “more quickly” this time around using tariffs that “don’t require a lot of process.” They point to Section 338 of the Tariff Act of 1930 and Section 203 of the International Emergency Economic Powers Act.

This raises questions about the possible consequences of tariffs for global economies and UK investors.

Will Trump’s tariffs fuel inflation?

One of the biggest concerns about Trump’s tariffs is that they could fan the embers of inflation. The United States is the world’s largest importer of goods. If tariffs are imposed on imports and other countries respond, the cost of goods could increase significantly.

Global supply chains could also be disrupted, as companies reconsider where their material imports come from to try to control costs. Again, consumers will likely feel the pinch as companies pass costs on to them in an effort to protect their margins.

Global economies operate in a complex web of interdependence, meaning the effects will not be limited to the United States and economies where tariffs are imposed. Analysis by the National Institute of Economic and Social Research (NIESR) suggests inflation in the UK could be 3-4 points higher over the next two years if Trump imposes the threatened tariffs.

While the tariffs announced this week against China, Mexico and Canada are at the top of Trump’s agenda, there is now a high risk that they will be closely followed by “punitive tariffs on other countries says Dan Coatsworth, investment analyst at the AJ Bell platform. . “Trump clearly wants to leave his mark and show that he is the boss,” he adds.

Coatsworth acknowledges that Trump’s tariff talks may be a negotiating tactic rather than a promise, but says the latest developments show the president-elect has “no intention of backing down at this time.”

Liberal Democrat MP and Treasury spokesperson Daisy Cooper today called on the UK government to “present urgent plans to protect the economy from Trump and reassure the public that we will not see the same type price spiral that we have all experienced in recent years. “.

What will be the impact of customs duties on the dollar?

Opinions differ on what Trump’s tariffs could mean for the American dollar. On the one hand, trade uncertainty linked to Trump’s 2018-2019 trade war tended to strengthen the greenback, according to Marina Valentini, global markets strategist at JP Morgan, although other factors also had an impact.

On the other hand, Randall Forsyth of Barron’s writes that tariffs could restrict the flow of goods and capital to and from the United States, thereby reducing the global use of the dollar.

Then there is inflation and interest rate to consider. If tariffs stoke the fire of inflation, it’s possible that rates will remain higher in the United States for longer than elsewhere. In theory, this would favor a stronger dollar – although the inflationary effects of tariffs would not be limited to the United States alone.

For now, a lot depends on what form the tariffs will take. “Much uncertainty remains,” Valentini writes, “notably whether a pricing strategy would be targeted in nature to negotiate commercial terms and protect intellectual property, or used as a large-scale revenue offset for other policy elements. “

Implications for investment markets

European markets felt the effects of the announcement this morning, with investors weighing the implications for economies and businesses.

Investors fear that Europe “could be next in (Trump’s) crosshairs,” says Matt Britzman, senior equity analyst at Hargreaves Lansdown. “After a series of three sessions on the rise and yesterday posting its highest level in a month, (the FTSE 100) opened down 0.3% this morning,” he adds.

Any disruption to global supply chains could increase costs for businesses and hurt investors. It comes at a time when UK businesses are already looking at higher costs in light of the Increase in National Insurance announced by Chancellor Rachel Reeves in the Fall budget.

As the difficulties of recent years began to ease, the tariffs could reignite inflation and make it more difficult for interest rates to fall. This would be bad news for the markets. In addition to making borrowing more expensive, rising rates keep consumer spending in check, limiting income growth and profit potential.

Meanwhile, for British investors who invest heavily in US stocks, there are now rumors that the so-called “Trump coup” could come to an end.

Tom Stevenson, chief investment officer at Fidelity International, says future tariffs “will likely impact U.S. consumer businesses due to rising input costs.” Additionally, investors have lowered their expectations for another interest rate cut at the Federal Reserve’s next meeting in December.

Investors will be closely watching any further clues ahead of Trump’s inauguration in January – and hoping his bark is worse than his bite.

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How will Trump’s tariffs impact investors?

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