To the increase in political uncertainty around trade, the increase in geopolitical uncertainty was joined when Donald Trump He proposed a controversial solution for the reconstruction of the Gaza Strip, largely destroyed during the conflict between Israel and Hamas, which is currently in the first phase of a high fire.
USA has announced 25% tariffs on imports from Canada and Mexico (Excluded Canadian energy exports, which would be taxed with 10%), along with additional 10% tariffs on China. Tariffs were going to be applied under the Law of International Emergency Emergency Powers, due to a «national emergency» around the «extraordinary threat that illegal foreigners and drugs imply, including the mortal fentanil.» This law gives President powers to promulgate measures of this type without having to consult the Congress. Trump also said that the EU tariffs «will definitely happen» and «will be very soon.» Canada immediately responded with 25% tariffs over 109,000 million dollars of American products, 20,000 million of which would be applied immediately and the rest in three weeks. The Canadian Prime Minister Justin Trudeau said: «We do not want to be here, we do not ask for this … but we will not go back to defend the Canadians.» The Mexican president, Claudia Sheinbaum, also said that there would be reprisals.
The markets were somewhat skeptical of the possibility that punitive tariffs continued, although we continue to observe significant volatility in the Canadian dollar and Mexican peso. The volatility From the Variable Income Markets, it remained moderate, with the belief that there was room for a reduction. After the calls scheduled by Trump with Trudeau and Sheinbaum, the opinion prevailed that tariffs would be delayed to continue negotiating. After those calls, the tariffs were delayed 30 days. Sheinbaum agreed to send 10,000 Mexican soldiers to the border between Mexico and the US, which, according to Trump, «will be specifically allocated to stop the flow of fentanyl and illegal migrants to our country.» He added: «I hope to participate in negotiations with President Sheinbaum, in our attempt to achieve an» agreement «between our two countries.» Trudeau, meanwhile, announced additional measures to an existing border plan of 900 million dollars. Trump said the delay would be «to see if a definitive economic agreement with Canada can be structured or not.» The tariffs were delayed on March 4 to allow a month of «negotiations.»
Trump has taken the United States to what seemed to be on the verge of a great commercial war with two alleged economic allieslinked by the USMCA trade agreement (United States, Mexico and Canada), which replaced NAFTA during Trump’s first mandate. Although for now the United States has taken a step back in the imposition of such punitive tariff issues such as illegal migration and drug trafficking. Together, China, Mexico and Canada represent about 40% of American imports, for a total of 1.35 billion dollars. In Trump’s first mandate, the administration focused «alone» at 350,000 million dollars of Chinese products. This week’s measures seem to have a political motivationbut whatever the reason, tariffs can have serious economic consequences if applied (and remains a «yes»). Both Mexico and Canada send more than three quarters of their exports to the United States, underpinned by the trade agreement signed by Trump in 2018. Both countries would probably fall into recession in case the tariffs were applied, while there would be a negative impact on US growth and inflation. However, this would be difficult to quantify given the probable mitigation in terms of lower demand, costs absorbed by lower margins and the transfer of the production of goods over time to the US. Pause means that adjustments to growth and inflation expectations can also be postponed, but continuous uncertainty will weigh on the decisions of companies. For companies that wish to avoid such consequences, the appeal to transfer production to US soil will continue.
China, Europe and the conflict in the Middle East
China celebrated the feast of the New Year lunar at the end of January, so its response has been moderate. Similarly, Chinese Variable Income Markets did not register great volatility. At the return of the holidays, the government’s response intensified. The spokesman of the Ministry of Foreign Affairs, Lin Jian, said his «determined opposition» to American tariffs on Chinese exports and requested «a dialogue and just and mutually respectful consultations.» China also responded with additional tariffs on American products, along with more aggressive antitrust research on some of the greatest American technological names, such as Alphabet and Apple. China’s retaliation tariffs began on February 10. According to the White House, Trump plans to talk to the Chinese president, Xi Jinping, so we will see if there is room for the approach.
In case commercial uncertainty it was not enoughTrump also generated some geopolitical uncertainty After his meeting with the Israeli prime minister, Benjamin Netanyahu, stating in a press conference that the United States will «take control» of the Gaza Strip and that the Palestinians of the enclave will be «reappeared.» The reconstruction of the region, where 70% of the buildings have been destroyed during the conflict between Israel and Hamas, is a huge task. However, the forced displacement of Palestinians not only violates international legislation, but also moves away from the usual political opinion of Western allies, which for a long time supporting a solution of two states for the conflict between Israel and Palestine. The measure has also been rejected by Saudi Arabia, who said that «it will not establish diplomatic relations with Israel» without a Palestinian state.
After all this, write about the meeting of Bank of England which took place last week, seems a welcome dose of normality. As expected, the monetary policy committee cut interest rates at 25 basic points, up to 4.5%. The monetary policy committee voted twice in favor of a cutting of 50 basic points. The bank also cut its growth forecasts by 2025 to 0.75%, compared to 1.5% provided for in November, and increased its inflation forecasts. Now they expect the CPI to reach 3.7% in the third quarter of the year, thanks to the increase in energy prices. Although a rebound of inflation in the coming months is expected, the governor, Andrew Bailey, described it as a «bump on the road», arguing that they hope to «be able to cut off the bank types as the process continues to continue of disinflation »and that» they will judge a meeting for meeting to where and how quickly. » Bailey rejected the idea that the United Kingdom is in a period of «stagflation», stating that they hope that GDP rebound from the middle of the year. In any case, with the economy about to experience significantly slower growth and inflation that remains well above the objective, life will not be easier for the chancellor in the short term, and it is likely that the “Office For Budget Responsíaility ”also make significant cuts in its 2% growth forecast for the United Kingdom in 2025.
It is not easy to draw conclusions from tariff and geopolitical noise. Trump 2.0 is fulfilling campaign promises, with decisive actions and threats against friends and enemies both economic and political. Taking lessons from the Trump’s first mandate is important: it is often better to wait and see what happens instead of taking your comments to the letter and make quick investment decisions based on them. Trump’s actions last weekend immediately led the leaders to the table and he will see this as a «victory.» But Canada and Mexico have actually made very limited concessions to convince Trump to delay tariffs, and the way it takes place next month will determine if we are on the edge once more. This episode gives weight to the argument that Trump is using tariffs, on his economic allies at least, more to negotiate than to increase income. It could be said that it is a different story in regard to China.