Trump, Tariffs, and Trade: What Businesses Need to Know

By Peter Zysk

While there are multiple goals, Trump’s views on trade – even before his political career – have revolved around three primary themes: (1) Reversing bi-lateral trade deficits; (2) Strengthening US manufacturing and promoting job growth; (3) Using tariffs as punitive tools for leverage in other areas, including supporting strategic industries, countering “unfair” trade and economic practices, and compelling other countries to take action, for example, in areas like restricting migration to the US.

The current level of uncertainty is high: Apart from campaign commitments, few details are currently known about what specific tariffs will be implemented, how they will be sequenced, whether they will come via legislation or statutory authority, which personnel will have responsibility over the trade agenda, and other details. We do anticipate President-elect Trump using his executive authority to implement tariffs rather than solely relying on a legislative route. Given this uncertainty, we advise clients to use scenario analysis and other modelling tools to prepare for a wide range of potential outcomes.

Limited congressional restraint: With Republicans controlling the House and Senate, Congress may be more inclined to support the President-elect in key priority areas and be less inclined to serve as a moderating force, particularly in the next two years, given the political risks associated with opposing the President-elect on this key priority area early on in his Administration.

Loyalty-focused personnel: Initial appointments favor loyalists with limited policy depth that is relevant to their posts. We will continue to closely monitor appointments that are relevant to the economic policy and trade agenda.

High potential for carve-outs (industry and country-level): Business leaders and world leaders with personal relationships with the President-elect and his key advisors, and brands that align well with President-elect Trump’s economic objectives (e.g. America First), may have the ability to influence specific outcomes.

Stock market as a constraining force: It’s understood the President-elect considers stock market performance as a barometer of policy success, potentially creating tension between the pro-tariff and pro-market President-elect. Sharp negative market reactions to proposed policy action may therefore act as a constraining force. A rise in inflation expectations could also act as a constraining force.

Greater strategic savvy: With lessons learned from his first administration, the President-elect and his team will be better able to navigate government processes to achieve goals more quickly.

Unpredictability as a strategic advantage: The President-elect views his unpredictability and perceived impracticality as a significant strategic advantage in negotiations.

Legislative action is one path for implementing tariffs, and with Republican control of the House and Senate Congress is likely to support the President-elect’s trade agenda. Taking a legislative route also would allow the administration to link trade policies to tax reforms ahead of the 2017 Tax Cuts and Jobs Act’s expiration next year. But the Trump administration also retains broad executive authority to impose tariffs.

The tariff proposals made during the campaign were mostly based on country of origin, not product, with some exceptions (autos most notably). However, if there is discriminatory treatment by industry, it is reasonable to expect EVs and solar panels to be first on the list.

Some differential treatment of countries could be based on how much the administration perceives them as responsible for: (1) offshoring American jobs and (2) re-exporting goods to the US with high levels of Chinese content (e.g. Mexico and potentially Vietnam).

Countries most likely to be targeted are China and Mexico to start. Note that Mexico is particularly vulnerable since it has become a transshipment point for Chinese exports to the US and the President-elect has already publicly threatened Mexico with further tariffs over non-trade disputes, including immigration and drugs.

As noted, the President-elect believes tariffs can be used to address trade imbalances – which also suggests a combative approach with EU members that run a trade surplus with the US (20 of the 27 do so today) – including Germany and Italy. The EU could also significantly be impacted by a redirection of Chinese exports from the US into its own market – including Chinese-made EVs. This would worsen the EU’s trade deficit with China and increase pressure on its de-industrializing economy.

Sectors/industries that could be among the most impacted are high tech, autos/auto parts and agriculture. Trump’s 100% tariff threat on countries that “leave the dollar” – in other words countries that are adopting the euro and renminbi more actively in international trade – could hit several large G20 developing countries, including India, Brazil and South Africa.

Most economists forecast an inflationary impact from higher tariffs – but, depending on sequencing, could take time to be passed through via prices so there could be a lagged impact in this area. The inflationary effect may be global given that many trading partners are likely to respond to higher US tariffs with retaliatory reciprocal tariffs, leading to a near-term increase in global price levels for imported goods.

It is important to note that the inflationary impact of tariffs during the first Trump and Biden administrations was rather muted; however, earlier tariffs primarily targeted intermediate rather than finished goods. The larger and broader tariffs now possible are likely to be more inflationary as they will hit finished goods and be directly borne by consumers. It is possible the President-elect will look to tier/stagger the tariffs to mitigate any downstream inflationary impact.

While Chinese leaders likely will seek to avoid a full-scale trade war and China has urged the US to not go down this route so far, that’s likely to have little influence on President-elect Trump’s decision making.

China also appears prepared for a significant response, but the scale and speed at which it responds will likely hinge on how aggressively and abruptly the US implements new tariffs.

China has several options for retaliatory action – since the previous Trump administration, it has put in place an “unreliable entity list” to blacklist individual companies and passed an “anti-foreign sanctions” law to punish companies that go along with US sanctions.

Beijing would likely retaliate first against US agricultural exports. It may also tighten restrictions on its own exports of critical minerals (including by bringing forward increasingly cumbersome licensing requirements for critical mineral exports), hurt US manufacturers in China with bureaucratic hurdles, and support consumer boycotts of US brands.

There is precedent for this: in 2018, China responded to US tariffs with tariffs on agricultural goods like orange juice and on symbolic American goods like Harley Davidson motorcycles and bourbon, and by implementing cumbersome licensing requirements for CM exports. Punitive actions could also target high-profile US investors and further diversify agricultural imports of grains and oilseeds away from the US to suppliers like Brazil.

Watch for how the President-elect fills his economic bench and whether/which individuals support a reciprocal tariff model that leaves flexibility versus historic hardliners that are likely to back full implementation.

Watch for threats of retaliation from non-US countries.

Watch for public statements from companies on whether/what they are doing to reduce their risk of getting caught in the crosshairs (including a greater focus on US domestic manufacturing).

Watch for the relationships that the President-elect builds and/or strengthens with world leaders – some of whom have changed since his first time in office.

Despite uncertainty, prepare for an extreme scenario in which promises on tariffs are fully and quickly implemented.

Companies that may be perceived as offshoring US jobs may be publicly called out – we know from experience that this is something the President-elect is willing to do.

Remember that symbolic American brands may be at a higher risk of retaliatory tariffs from other countries, even if they are more likely to find favor with the new administration for supporting their America First strategy.

Think very carefully about overall supply chains, distribution of labor and resources around the world, and where vulnerabilities might be.