U.S. President Donald Trump recently sent letters to 14 trading partners outlining new tariff rates that will soon take effect. Japan, South Korea, Malaysia and Kazakhstan are among these countries. They highlight South Africa, Laos, Myanmar, and Bosnia and Herzegovina, as well as Tunisia, Indonesia, Bangladesh, Serbia, Cambodia, and Thailand. Implementation of these new tariffs, ranging from 25% to 40%, is scheduled to take effect on August 1. This announcement has resulted in confusing reactions from international equity markets and economic forecasters.
What President Trump’s letters don’t say
In no uncertain terms, President Trump’s letters specify the new tariffs. These tariffs cover each country’s exports to the U.S. There were letters sent to the European Union, India and Taiwan. This has caused American analysts to guess at the possibility of draft trade deals with those countries. Paul Ashworth, the chief North America economist at Capital Economics, noticed an intriguing trend. He noted that the sudden silence coming from these major trading partners might indicate they’re getting close to the end of negotiations.
Trump again referred to the August 1 deadline for the new tariff rates as “firm, but not 100% firm.” This points to some hope that he’ll be receptive to meaningful negotiations. This commitment is the first step and signals that his administration is willing to discuss trade with countries that are impacted.
“If [the affected countries] call up and they say we’d like to do something a different way, we’re going to be open to that,” – U.S. President Donald Trump
Economists and trade analysts have responded with divided opinions as to the overall effects these new tariffs would have on the economy. As our deeply missed friend, Dan Coatsworth, pointed out, it’s like investors have learned how to surf Trump’s policy tsunami. He cautioned that retaliatory tariffs act like a tax on commerce. He warned against making a knee-jerk economic impact prediction based on these proposed changes.
“At present investors seem comfortable riding Trump’s seesaw path to policy setting, but reciprocal tariffs are a tax on activity and it is too early to judge the actual impact on the economy. Perhaps things will change if we start to see a direct link in economic numbers.” – Dan Coatsworth
Kiran Ganesh from E3 presented a wider contextual framework for understanding market expectations about tariff impacts. He said that the market is now expecting that tariffs will settle in the end around today’s effective rate of 15%. Yet, differences are possible at the country-level and sectoral-level.
“Overall, the market generally seems to be comfortable with the idea that tariffs will probably settle close to the current effective rate (15%), albeit with likely lower country-level tariffs and more sector-level (semis, pharma, minerals) tariffs to come,” – Kiran Ganesh
Other trade experts are still doubtful about the practicality of accomplishing so many deals in such a short time span. Trade expert Toni Meadows noted that it might take several months or years to finalize a detailed comprehensive trade deal. She proposed that expecting a lot of near-term gains would be unrealistic.
“One comprehensive trade deal could take months, even years, to negotiate so the market didn’t believe that 90 partial deals in 90 days was ever possible,” – Toni Meadows
These market reactions to both Trump’s letters of intent and the tariff announcements show a sign of cautious optimism from investors. As many people realized, absent these negotiated agreements, the effective tariff rate on U.S. imports would go up. It will increase from 15.5% to 17.3%. Given the expected raise of around $4,300, this is likely to have considerable effects on trade patterns and consumer costs.