Why Tariff Threats Call for Patience—Not Panic

Editors’ Note: MarketMinder Europe is politically agnostic. We favour no politician nor any party and assess developments for their economic and market effects only.

Early Tuesday, US President-elect Trump announced he plans, via Executive Order, to impose an extra 10% tariff on all Chinese imports and a blanket 25% levy on Mexico and Canada until and unless their governments address the flow of Fentanyl and undocumented migrants, respectively, into the US.^[i] It didn’t take long for commentators we follow to extrapolate this to the death of the US, Canadian and Mexican auto industries, the start of a massive global trade war and even a “currency war” as China devalues its currency to offset tariffs’ impact.^[ii] Other publications we follow warned the UK and Europe may be next in Trump’s sights, as he talks tough on trade worldwide.^[iii] Unsurprisingly, this speculation received the blame for Tuesday’s volatility in international stocks.^[iv] We recommend taking a deep breath. Stocks have seen this movie before, as we will explain.

We don’t pretend to have special insight into Trump’s thinking. We don’t think anyone can claim that. But we do have a four-year sample of how he has tended to use tariff threats. Frequently, we find they are negotiating tools, levers used to motivate discussions and concessions on difficult topics. All throughout the 201 election campaign, Trump threatened to rip up the North American Free Trade Agreement (NAFTA), upending over two decades of free trade amongst the US, Mexico and Canada.^[v] But once he was in office, all three parties came to the table and ended up signing a new pact, the US Mexico Canada Agreement.^[vi] Known as the USMCA, it broadened NAFTA’s scope, expanding free trade. In our view, this is a prime example of widespread negativity around tariffs lowering expectations and creating room for positive surprise to be a bullish stock market tailwind.

But despite the USMCA, Trump still used tariffs in his foreign policy dealings with both countries. After initially exempting them from steel tariffs, Trump extended those tariffs to Mexico and Canada in 2018, prompting retaliatory action.^[vii] Talks ensued, and the tariffs were lifted in 2019.^[viii] At around the same time, Trump threatened blanket tariffs on all imports from Mexico—starting at 10% and gradually rising as high as 25%—unless Mexico’s leaders took action over illegal border crossings.^[ix] Crucially, they never took effect. Rather, they seemingly prompted talks and an eventual deal.

Tariffs on China did take effect, yet there too, Trump struck deals to keep tariffs lower than most publications we follow previously predicted.^[x] And the tariffs that stuck (and that persist to this day) ended up rerouting trade through Vietnam and other intermediaries (including Mexico), rather than squashing it or sticking US consumers with much higher bills.^[xi]

But overall, we think the main theme is this: Tariffs > Talks > Deal. Not every time, but more often than not, and generally leading to outcomes that were milder than widely projected amongst economists. In our view, that was enough for stocks, as markets don’t need perfect, risk-free conditions. Our research finds they move on the gap between expectations and reality. A reality that is simply not as bad as originally predicted can therefore be a big positive surprise.

This time, the threats seem to be following the same blueprint. They look to us like negotiation tactics, loud calls to the table. Will they work? An open question. Maybe they lead to a deal. Maybe other countries band together to increase their clout. We don’t have a crystal ball, and we haven’t bugged anyone’s office, so who can really say. But we also don’t need immediate answers, and nor do markets, because our research suggests they pre-price all of it. Stocks outside the US have had a rocky road for the past month or so, which we think has a lot to do with tariff chatter (Ukraine and economic jitters likely contributing, too).^[xii] It seems to us they are pricing fear as expectations drop. In our view, that sets the bar pretty low for reality to beat.

So stay tuned, but we don’t think it is beneficial to act rashly. We don’t think stocks like tariffs, and we agree they are usually an economic negative. Anything that makes commerce more complicated and costlier is generally not a plus, in our view. However, we have also seen that the US and global economies are pretty darned good at adapting. We have the recent history of tariffs not causing a bear market in Trump’s first term (2020’s bear market was mostly due to pandemic-related lockdowns, in our view).^[xiii] We also have decades of market history showing tariff tiffs throughout the world aren’t automatic recession (a period of contracting economic output) triggers.^[xiv] Scope, scale and surprise all matter, in our view.

Note, too, this interesting quirk: The negative market reaction to all this is predominantly outside the US.^[xv] But tariffs, should they happen, would hit the US economy as well as trading partners. Arguably more so! Based on our research, US markets hear the same chatter, see the same warnings, price in the same information. If they are up and clocking new highs at the same time tariff fears hit returns abroad, that seems to us like a very strong indication this is all about sentiment.^[xvi] Especially when you consider that global developed markets tend to be highly correlated directionally.^[xvii]

Therefore, we suggest investors seeking long-term growth be patient, stay calm, and assess the situation with a cool head. If tariffs escalate to the point of bearishness, investors’ window to act probably won’t be two seconds wide, just as it doesn’t appear to be today. They will likely have time to think cooly, calmly and objectively. Reacting in the heat of the moment is never the wise move, in our view, whether investors are reacting to ostensibly good or bad news. We think patience and wisdom, not gut reactions, are the best route forward here.