Why Tariff Threats Call for Patience—Not Panic

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

Early Tuesday, President-elect Trump announced he plans, via Executive Order, to slap 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. It didn’t take long for headlines 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. Tariff terror also, predictably, got the blame for Tuesday’s volatility in international stocks. Take a deep breath. Stocks have seen this movie before.

We don’t pretend to have special insight into Trump’s thinking. No one can claim that. But we do have a four-year sample of how he tends to use tariff threats. Frequently, they are negotiating tools, levers used to motivate discussions and concessions on difficult topics. All throughout the 2016 campaign, Trump threatened to rip up the North American Free Trade Agreement (NAFTA), upending over two decades of free trade among the US, Mexico and Canada. 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. Known as the USMCA, it broadened NAFTA’s scope, expanding free trade. It is a prime example of tariff fears lowering expectations and creating room for positive surprise to be a bullish 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. Talks ensued, and the tariffs were lifted in 2019. 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. Crucially, they never took effect. Rather, they prompted talks and a deal.

Tariffs on China did take effect, yet there too, Trump struck deals to keep tariffs lower than most feared. 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.

But overall, the main theme is this: Tariffs à Talks à Deal. Not every time, but more often than not, and generally leading to outcomes that were milder than feared. For stocks, that was enough. Markets don’t need perfect, risk-free conditions. They move on the gap between expectations and reality. A reality that is simply not as bad as feared can therefore be a big positive surprise.

This time, the threats seem to be following the same blueprint. They look and smell 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 they pre-price all of it. International stocks have had a rocky road for the past month or so, ostensibly on tariff fears (with a side of Ukraine and economic jitters, most likely), with some countries on the cusp of a correction when returns are defined in US dollars (sharp, sentiment-driven moves of -10% to -20%). They are pricing fear as expectations drop. That sets the bar pretty low for reality to beat.

So stay tuned, but don’t panic. We don’t think stocks like tariffs, and we agree they are an economic negative. Anything that makes commerce more complicated and costlier is generally not a plus. 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. We also have decades of market history showing tariff tiffs throughout the world aren’t automatic recession triggers. Scope, scale and surprise all matter.

Note, too, this interesting quirk: The negative market reaction to all this is predominantly outside the US. But tariffs, should they happen, would hit the US economy as well as trading partners. 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. Especially when you consider that global developed markets tend to be highly correlated directionally.

Therefore, be patient, stay calm, and assess the situation with a cool head. If tariffs escalate to the point of bearishness, your window to act probably won’t be two seconds wide, just as it doesn’t appear to be today. You will have time to think cooly, calmly and objectively. Reacting in the heat of the moment is never the wise move, whether you are reacting to ostensibly good or bad news. Patience and wisdom, not gut reactions, are your best friends here.