Now the United States President has matched that courage with action by signing an Executive Order. This order imposes a 25% tariff on all non-US manufactured cars and light trucks, which is a bill that has enormous international implications. Such a decision would greatly increase the existing base tariff from 2.5%. It should lead to major economic and diplomatic consequences. The announcement created outrage among world leaders, highlighting the massive global condemnation. Canada, the European Union, and more recently China have been calling out on how it will harm their respective economies and the global economy at large.
Last week, the US President threatened to impose reciprocal tariffs on April 2nd. He went on to argue that other countries might be “delighted” with the outcome. Although this step was largely expected, the announcement produced only modest swings in the Mexican Peso and the Canadian Loonie. These tariffs will dangerously damage long-standing international relations. They’re going to shape the broader pattern of economic stability in the weeks ahead.
Strong Reactions from Canada and the EU
To the shock of many, the Canadian Prime Minister was the first out of the gate, calling the new tariffs a “direct attack” on Canadian workers. The introduction of these tariffs would be a crippling blow to Canada’s automobile sector. This sector has been severely impacted by their reliance on the U.S. export market. The Canadian Prime Minister then followed up with an equally stern warning of possible retaliatory measures. He made it clear that Canada will not roll over and accept whatever Canada sees as an unjust economic attack.
The European Union has made no secret about how dissatisfied it was. Its Commission President, Ursula von der Leyen, described the US decision as “deeply regrettable.” The EU is preparing to assess the potential impact of these tariffs. In the days ahead, they’ll analyze other US trade measures. Imposing these tariffs goes against the very tenets of free trade. These principles have traditionally undergirded U.S. foreign policy and global economic engagement.
Economic Implications and Market Reactions
The economic implications of these tariffs are complicated. Futures on all three major US equity indexes were up 0.1% during Asia trading, suggesting a rosy outlook for domestic manufacturers. In stark contrast, other sectors are bracing for some very harmful impacts. As Luis Centeno from the European Central Bank noted, tariffs are a type of tax. He cautioned that they are capable of severely inhibiting long term economic growth.
The German Association of the Automotive Industry (VDA) echoed these sentiments. They cautioned that the US auto tariffs deliver a “death nell” to free trade. By passing this legislation, they’re upending the publicly accepted status quo of international trade. Second, it heightens alarm over the threat posed by protectionist policies that would dramatically hold back global economic growth.
Global Trade Order Under Threat
On the international front, the decision has raised concerns of increasing trade hostilities between the US and China. An ex-advisor to China’s People’s Bank of China (PBOC) has raised the alarm. He said that China should make preparations to defend itself against possible trade wars instigated by the United States. Now, in a stark example of the warning, we are reminded of the global geopolitical ramifications of the US’s aggressive trade war.
The financial markets have already started to respond to these moves. The EUR/USD currency pair remained on the defensive, testing a three-week low, as gold prices reflected positive sentiment. Both moves indicate investor nervousness and a flight to safety as fears continue to grow over the stability and sustainability of the economic recovery.