Trump threatens to impose tariffs on China and the European Union, and markets are waiting economy

US President Donald Trump said that his administration is discussing imposing 10% customs duties on goods imported from China on February 1, and Trump attributed this to “the narcotic fentanyl being sent from there to Mexico and Canada.”

Speaking to reporters at the White House yesterday, the US President added that he had already imposed large customs duties on Beijing during his first term.

Trump blames Canada and Mexico for the flow of drugs, and said before assuming the presidency that the fees he would impose would remain in effect until these flows stopped.

He pointed out that the United States also faces trade imbalances with European Union countries and others.

“The European Union is very bad with us. So they will face tariffs. It’s the only way to get justice,” Trump said, repeating comments he made the day before yesterday.

European response

Meanwhile, European Commission President Ursula von der Leyen yesterday warned of a danger she described as a “global race to the bottom” using economic tools such as sanctions, export controls, and customs duties.

In a speech at the annual World Economic Forum the day after Trump’s inauguration, von der Leyen spoke of a new era of cutthroat geostrategic competition.

“As this competition intensifies, we are likely to continue to see the frequent use of economic tools, such as sanctions, export controls and tariffs, intended to protect economic and national security,” she said, but she said innovation should not be stifled.

“In this spirit, we must work together to avoid a global race to the bottom because cutting ties in the global economy is in no one’s interest. Rather, we need to modernize the rules in order to support our ability to achieve mutual gains for our citizens,” she added.

This week, European Commissioner for Economic Affairs Valdis Dombrovskis confirmed that the European Union is ready to “defend its interests.”

Meanwhile, French Prime Minister François Bayrou said – the day before yesterday – that France and Europe as a whole must stand up to the American president and his policies, otherwise they will face “crushing.”

Market fluctuations

However, it seemed as if investors breathed a sigh of relief after it became clear that the US President’s initial policy on customs duties was less stringent than they had feared, but the ambiguity surrounding this policy heralds a state of uncertainty in global markets.

Trump had pledged to impose heavy tariffs ranging between 10 and 20% on global imports to the United States, and 60% on goods coming from China.

After taking office the day before yesterday, Trump did not immediately impose tariffs, but rather issued an order directing agencies to “investigate and address the US trade deficit.”

Later that day, Trump told reporters that he was considering imposing 25% tariffs on Mexico and Canada early next month.

Overall, this led to volatility in the markets, as the dollar regained some of its gains against the Mexican peso and the Canadian dollar once Trump made his comments.

The “American Green” initially declined due to the news that there would be no tariffs.

“The extent of Trump’s protectionist policies remains the market’s primary focus,” said Matt Wheeler, head of market research at StoneX. “So far, there are early signs that he may be less aggressive (on tariffs) than feared.”

Uncertainty

The first 24 hours of Trump’s presidency confirmed what investors expected: the only certainty about Trump’s second presidency appears to be uncertainty.

Chinese markets were relieved after Beijing avoided an immediate “storm” of US executive orders, while the Mexican peso and Canadian dollar recorded gains yesterday after falling the previous day.

“Markets are going through a moment of uncertainty,” said Callie Cox, chief market strategist at Ritholtz Wealth Management. “No heavy tariffs were imposed on Day 1 (of the Trump presidency) and concrete details may still be elusive.”

For his part, Nigel Green, CEO of De Vere Financial Advisory Group, said that the consequences of imposing 25% customs duties on Mexico and Canada “could be catastrophic.”

The Chinese yuan and Hong Kong stocks rose yesterday, but shares of battery manufacturers and wind energy companies fell after Trump confirmed that he would reverse green energy policies and withdraw the United States from the Paris Climate Agreement.

A strong round of US tariffs could push economies from Canada to Europe into recession.

While Europeans seem most concerned about Trump’s return, countries such as Brazil, China, India and Turkey believe that it will be beneficial for them and for world peace, according to a recent poll conducted by the European Council on Foreign Relations.

Lord of harm is beneficial

However, the unpredictability of US politics does not spook all investors.

“We are active managers, so this is a great environment for us,” said Konstantin Veit, European portfolio manager at bond giant Pimco. “We like uncertainty and we like volatility because it gives us opportunities.”

PIMCO expects the negative impact of the tariffs to lower interest rates in Europe and elsewhere, but could also push US Treasury yields to 5%.

Trump takes office with an ambitious agenda that includes trade, immigration, tax cuts, and deregulation, which could boost the American economy.