We knew they were coming. There was little doubt the Trump Administration was going to utilize tariffs for various reasons. They were a favorite tool of the previous Trump Administration, and they are for this one as well. The lingering question is to what extent they will be implemented and how long they will be in place. After all, tariffs are supposedly – in part – a tool of a negotiation. If you want stronger border security, use tariffs as a stick to garner assistance on the other side of the border (Mexico and Canada). If you want to generate more cooperation in the geopolitical sphere, you implement a tariff (China).
And it is not the first go around either. During the first Trump Administration, the trade war broke out in 2018 and was primarily focused on China. There was a significant back and forth between the two countries, and eventually a deal was made. All of that faded in importance rather quickly as the covid lockdowns took effect and trade became a secondary issue.
This time around is different. Instead of the focus being solely (or largely) on China, it is concentrated on the 3 top trading partners (from a US import perspective) of the US. Mexico is a larger trading partner than China, and far more important for many companies following the first trade war and covid. Supply chains moved closer to the US encouraged by the combination of tariffs and shipping issues (remember when people were counting ships off the coast of California?). That did not fully diminish China’s importance though. It remains the number two source of imports. For its part, Canada is number 3.
That is quite the way to kick off the second trade war.
To be clear, it is not as though markets have been taken by surprise. Between direct statements from President Trump and media articles, it was a known that there would be tariffs. The unknowns were the size (now known) and length (still unknown). That will determine the severity of the policies for markets.
When it comes to retailers (largely believed to be the most exposed to tariffs), the recent performance has been varied. That will continue. For some, there are tailwinds as tariffs create opportunities to purchase more discounted goods. Others have diversified their supply chains to avoid most or even all of the tariffs. But some have not taken the last 6 years to invest in more resilient business models. Those companies will suffer from the policies put in place and the threats of the future.
In the end, tariffs and trade wars are not ideal. But they can be navigated, and there will be chances to take advantage of dislocations in the market.