If you’re already feeling overwhelmed by the sheer amount of news to ingest on Donald Trump’s tariffs plans in recent weeks, well, you’re not alone.
One measure of «policy uncertainty», which measures how much certain issues are dominating news coverage, shows that the uncertainty levels over trade are currently higher than they’ve been in decades.
But even that index struggles to capture the extent of uncertainty.
Will the on-again off-again tariffs on Canada and Mexico actually be implemented? What about the tariffs on steel and aluminium, due to be implemented this week? So far, the only tariffs that have actually taken effect are the extra 10% levies imposed on China a few weeks ago.
But then Donald Trump has since talked about an extra 10% on top of that, not to mention a set of «reciprocal tariffs» intended mostly to hit the European Union. It’s very hard to keep pace with it all.
However, one of the impacts of all this uncertainty is that US share prices have been performing far worse than their international counterparts.
Many had assumed, based on his behaviour last time around, that Donald Trump would shy away from any decisions causing long-term damage to share prices, but the S&P 500 index is down over 6% since the inauguration, compared to a 12% rise in Germany‘s currency-adjusted index. Some are calling it the «Trump Slump».
Markets don’t like uncertainty; nor do they like inflation, especially the kind caused by tariffs, which impose an extra cost on all imported items. Whether this is a price worth paying rather depends on what the White House intends to achieve from this.
The ostensible goal – beyond extracting something from countries like China and Canada – is to seek to reindustrialise the US by preventing manufactured goods from entering quite so easily. But is that likely to happen?
For some evidence, look no further than the last time Donald Trump imposed tariffs on metals, back in 2018. The levies on aluminium (then a «mere» 10%) certainly caused a slight rise in domestic production as more smelting capacity was brought back online.
But that bump was short-lived. By the end of his first term, production was back, more or less, to where it was before the tariffs. In the intervening period, aluminium production has dropped to unprecedented lows.
The White House’s argument is that this is down in part to the fact that a) some countries, notably Canada, were excluded from the tariffs and b) the level of tariff was too low. Hence why it’s been raised to 25%. But the aluminium industry itself has said that Canada really needs to be excluded from this round of levies. Will those appeals bear fruit? Again, no-one really knows.
What we do know is that many parts of American industry, from high tech producers of planes and cars, all the way down to soft drinks can manufacturers, rely on imported aluminium. In the very long run, some companies might get old smelters up and running, or build new ones. But it takes years to do so.
In other words, in the intervening period there is likely to be some significant economic pain as the cost of all that metal goes sharply higher.
Nor is it altogether clear whether a rational investor would really put the necessary funds into building a new smelter.
The numbers might add up if the tariffs stay in place. But what guarantee do they have that they will stay in place? Since no-one really knows, the chances of anyone putting their money into that industry are more constrained than usual.
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What we do know is that in the meantime, other countries are retaliating with other trade weapons.
China has imposed limits on exports of key metals like tungsten and molybdenum – in both cases it is the world’s biggest producer. That, in turn, will further raise costs for American producers.
The upshot is the coming months and years will be bumpy and tough for the American economy. Then again, trying to re-industrialise a country like America – or for that matter the UK – is no mean feat. Trying to do it at breakneck speed using a set of blunt tariffs is all the harder.