Global Economy & Markets, Weekly Roundup 03/02/25
Global trade concerns resurface, with market volatility increasing
On February 3rd, the US made a deal with Mexico and Canada to delay planned tariffs for one month, in exchange for more troops on its southern and northern border, in order to address the sustained influx of illicit drugs and curb immigration. Previously, on February 1st, the White House had announced an additional rate of 25% on goods imports from Mexico and Canada, with the exception of energy resources, for which the levy is limited to 10%. Note that Canada accounts for circa 55% of US imported petroleum, oil and gas, or $125 billion.
In addition, President Trump announced an additional 10% tariff on all goods imported from China, effective as of February 4th. Chinese Authorities announced their decision to retaliate on Tuesday, while opening an antitrust probe into Google. More specifically, US coal and LNG will be subject to extra 15% tariff. Crude oil, agricultural machinery and large vehicles, including pickup trucks will have an extra 10% tariff. The Chinese tariffs are set to kick in on February 10th, affecting goods that totaled circa $15 billion in 2024 (or 0.7% of total US exports and 10% of total US exports to China) in order to indicate Authorities' readiness to retaliate, but also their preference for negotiations.
Note that the US imported circa $3.3 trillion worth of goods in 2024, of which Mexico, Canada and China made up 16%, 13% and 14%, respectively. The effective tariff rate on all goods -- duties collected divided by total goods imports -- is currently 2.3% according to our estimates.
Assuming no change in nominal import values and bilateral import flows (a rather strict assumption), each of the policies stated above would increase federal receipts from custom duties by circa $255 billion or 0.9% of US GDP to $330 billion, with the effective tariff rate increasing to 10%. Considering dynamic estimates assuming lower import values and substitution toward non-tariff goods (Yale Lab), the fiscal impact of the tariff proposal would increase custom duties by circa $150 billion, with the effective tariff rate rising to 8.6%.
President Trump has also raised the prospect of increasing tariffs on goods imported from the European Union. All told, the likelihood of more widespread tariffs has increased. As a result, if materialized, it could impede global economic activity and trade hurting, inter alia, corporate profitability (via margin compression) and valuations.
Risk assets entered the current week on a weak footing as expected, due to trade developments, with modest deviations among equity regions and sectors, albeit equities trimmed their losses after President Trump suspended additional tariffs (Mexico, Canada) for one month (S&P500: -0.8%, Eurostoxx: -1.2% on Monday). The initial market reaction was a sharp USD rally, albeit FX majors also cut their losses intra-day.
The Federal Reserve stood pat, as expected, with the FFR at a range of 4.25% - 4.50%. Such a decision was deemed appropriate given the rate easing of -100 bps cumulatively since September 2024, combined with US trade policy uncertainty and inflation demonstrating stickiness in recent months. The Fed paused, but not stopped, its rate cutting cycle. The European Central Bank reduced, as expected, its main policy rates by -0.25%, to 2.75% for the Deposit Facility Rate, pointing to another rate cut in March.
On February 3rd, the US made a deal with Mexico and Canada to delay planned tariffs for one month, in exchange for more troops on its southern and northern border, in order to address the sustained influx of illicit drugs and curb immigration. Previously, on February 1st, the White House had announced an additional rate of 25% on goods imports from Mexico and Canada, with the exception of energy resources, for which the levy is limited to 10%. Note that Canada accounts for circa 55% of US imported petroleum, oil and gas, or $125 billion.
In addition, President Trump announced an additional 10% tariff on all goods imported from China, effective as of February 4th. Chinese Authorities announced their decision to retaliate on Tuesday, while opening an antitrust probe into Google. More specifically, US coal and LNG will be subject to extra 15% tariff. Crude oil, agricultural machinery and large vehicles, including pickup trucks will have an extra 10% tariff. The Chinese tariffs are set to kick in on February 10th, affecting goods that totaled circa $15 billion in 2024 (or 0.7% of total US exports and 10% of total US exports to China) in order to indicate Authorities' readiness to retaliate, but also their preference for negotiations.
Note that the US imported circa $3.3 trillion worth of goods in 2024, of which Mexico, Canada and China made up 16%, 13% and 14%, respectively. The effective tariff rate on all goods -- duties collected divided by total goods imports -- is currently 2.3% according to our estimates.
Assuming no change in nominal import values and bilateral import flows (a rather strict assumption), each of the policies stated above would increase federal receipts from custom duties by circa $255 billion or 0.9% of US GDP to $330 billion, with the effective tariff rate increasing to 10%. Considering dynamic estimates assuming lower import values and substitution toward non-tariff goods (Yale Lab), the fiscal impact of the tariff proposal would increase custom duties by circa $150 billion, with the effective tariff rate rising to 8.6%.
President Trump has also raised the prospect of increasing tariffs on goods imported from the European Union. All told, the likelihood of more widespread tariffs has increased. As a result, if materialized, it could impede global economic activity and trade hurting, inter alia, corporate profitability (via margin compression) and valuations.
Risk assets entered the current week on a weak footing as expected, due to trade developments, with modest deviations among equity regions and sectors, albeit equities trimmed their losses after President Trump suspended additional tariffs (Mexico, Canada) for one month (S&P500: -0.8%, Eurostoxx: -1.2% on Monday). The initial market reaction was a sharp USD rally, albeit FX majors also cut their losses intra-day.
The Federal Reserve stood pat, as expected, with the FFR at a range of 4.25% - 4.50%. Such a decision was deemed appropriate given the rate easing of -100 bps cumulatively since September 2024, combined with US trade policy uncertainty and inflation demonstrating stickiness in recent months. The Fed paused, but not stopped, its rate cutting cycle. The European Central Bank reduced, as expected, its main policy rates by -0.25%, to 2.75% for the Deposit Facility Rate, pointing to another rate cut in March.
