Aberdeen: Five questions (and answers) ahead of Trump’s tariff announcements
James McCann, Deputy Chief Economist at Aberdaan, answers five questions ahead of the new tariffs that US President Donald Trump will announce today.
'Trump’s announcements are expected to push the average US tariff rate well above 10%, though we think some tariffs will be partially reversed over coming weeks and months, which alongside shifting trade flows, may moderate the effective tariff rate back down closer to 10%. However, the balance of risks is skewed towards even more disruptive policies. And, while these announcements could mark something of a high-water mark for uncertainty, there are likely many twists and turns in US tariff policy still to come after today.'
1. Everything in one fell swoop, or a drip feed?
We expect trade investigations to culminate in three major strands: specific action targeting China; a reciprocal tariff framework; and sector-specific measures aimed at autos (already announced), semi-conductors and pharmaceutical products.
There has been speculation that some of these initiatives could be delayed, which would be taken positively by markets. However, Trump has pushed back on this, and we expect wide-ranging announcements. Indeed, the administration has said that all tariffs announced today will be implemented immediately.
Nonetheless, given the speed with which the administration has formed trade policy, there remains considerable risk that announcements do not represent the high-water mark on tariffs, with additional announcements and changes are very possible going forward.
2. How will the reciprocal tariff framework work?
Press reports have speculated the initial focus will be on the 10-15 countries that account for around 80-90% of US imports. But again, Trump has sounded more expansive on the number of countries to be targeted. A broader application of tariffs would constitute a downside surprise for markets.
Additionally, the extent to which this framework applies to both tariff and non-tariff barriers will be important.
We suspect that most action will be directed at easier-to-measure (and potentially easier to bring down) tariff barriers.
However, a greater focus on non-tariff policies, including sales taxes, would be negative for markets. This would push tariffs higher and make them harder to reverse.
3. How badly will China be hit?
Tariffs have already increased by 20% on all imports from China. We are pencilling in a further 10% increase, pushing the effective tariff rate close to 45%.
However, the risk is tilted towards an even larger increase, especially given the broad range of grievances cited by the administration – fentanyl, state subsidies, non-tariff barriers to US exports, currency manipulation and reneging on the ‘Phase 1’ agreement.
4. Will tariffs 'stack'?
There is ambiguity over how different tariff measures will interact. For example, if the EU is hit with a 10% reciprocal tariff, will the 25% autos tariffs stack on top of this to reach 35%, or will the product-specific measures represent a ceiling? We have assumed the latter in our base case, but stacking of tariffs is a clear downside risk.
Related is the question of how the administration will proceed with tariffs on imports from Mexico and Canada. A continued exemption of USMCA-compliant goods would mean scope to reduce the share of tariffed goods over time.
In contrast, a more disruptive approach to drive onshoring is possible. Even in this case, Mexico and Canada remain best placed to strike a deal that eventually puts USMCA back onto a firmer footing.
5. Will market moves moderate policy?
Some of the administration’s rhetoric around tariffs has suggested it is genuinely committed to materially shifting patterns of global trade and production.
This has sometimes been framed as a willingness for 'short-term pain' in pursuit of alleged 'long-term gain'.
As such, adverse market reaction to tariff announcements may do little to deter the policy agenda, with the 'Trump put' still well out of the money.
On the other hand, White House leaks seem to suggest Commerce Secretary Howard Lutnick may be increasingly blamed within the White House for negative market moves.
Personnel changes within the administration are a key waymark for how market pressures are influencing policy.