The U.S. recently raised tariffs, as announced earlier this year – however, the U.S. then delayed the tariffs on Canada and Mexico until March 4. In the short term, this reprieve helped CAD and MXN appreciate against the USD. Below, we outline the impact of such tariffs if they are to remain.
What’s the impact on the economy?
Firstly, trade tensions were a means to an end outside the economic sphere, e.g., concerning immigration and the fentanyl crisis. We see them largely as a tool of negotiation tactics to reach other goals. We still believe that tariffs are ultimately only temporarily imposed until politically acceptable solutions are achieved.
Second, the trade tariffs are likely to have less of an inflationary impact in the United States than a deflationary impact elsewhere. The U.S. consumer is too dominant, and foreign manufacturers are likely to grant concessions on prices to keep market shares. A stronger U.S. dollar also helps to buffer the trade tariff impact. Looking at the details, the effects will likely be more nuanced. In some segments, the powers are more balanced, for example in the case of oil, metals, and autos. Canada can likely sell its oil on global markets after transit through the United States without U.S. tariffs. Under such circumstances, the tariff burden will fall rather on U.S. consumers.
Similarly, the cars produced in Mexico for the United States are less likely to be sold elsewhere, which allows manufacturers to increase prices.
Third, the tariff spat injects a decent dose of uncertainty into markets, just as expected. The uncertainty spans the hard-to-predict political reactions and possible period of tit-for-tat, but also the yet-unclear economic effects. Europe so far remains spared but is likely to face another round of U.S. trade tariffs too. The coming weeks and months will reveal whether trade politics spirals out of control, and how long the economies of the United States and its trade partners will witness hits on household budgets and business profits.
As a consequence of the elections, we already expected the U.S. economy to teeter closer to overheating territory. Our forecast of U.S. consumer inflation hitting 3.7 percent in the third quarter might be exceeded. Besides tariffs, immigration policies and constraints on labor supply are inflationary. Conversely, our 2.5 percent growth forecast beyond mid-2025 might be undershot. Initial estimates put the negative impact on growth from more lasting additional tariffs at 0.4 percent.
As we have mentioned, for U.S. trading partners, the outcome in that case would be deflationary and recessionary. The latter could in turn be the final wake-up call for China and for the eurozone after the upcoming German elections to finally help themselves via stimulus programs.
Impact on metals
For gold and silver, the impact of U.S. tariffs is primarily on the refining value chain. The U.S. imports a significant amount of gold and silver doré from Canada and Mexico for refining, which has now become more expensive. Some of this material might be rerouted to Europe.
Within the industrial metal markets, aluminum sticks out. The U.S. relies heavily on Canadian aluminum, making up around two-thirds of its total imports, with some corporations integrating the value chain across the border to reap the benefits of both locations. Recently, Trump imposed 25 percent import tariffs on all aluminum and steel products. This chapter seems like a remake of spring 2018, when similar measures were introduced on the basis of national security concerns, even though at a lower rate of only 10 percent for aluminum. To what extent the new tariffs will replace or complement the old ones is unclear at the moment.
The supply situation regarding aluminum and steel in the U.S. is quite different. For steel, the U.S. is less dependent on imports as domestic production has been holding up more solidly during the past decade. That said, Trump’s target from his first presidency to revive the aluminum and steel industries has not materialized. Since then, challenges in the global markets have increased, primarily due to Chinese overproduction and a wave of exports sweeping across countries.
Generally speaking, the fundamental impact on metals demand depends on the question of how long the tariffs will remain in place.
Regarding our earlier points of tariffs being inflationary at home in the U.S. – primarily via higher domestic price premiums – and deflationary abroad, we still see the tariffs as an overhang for sentiment that should keep industrial metal prices in check, at least in the short term.
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What does this mean for investors?
Investors should not despair about the obvious turmoil that lies ahead. Instead, we suggest staying calm and waiting for the twists and turns to evolve before taking any sizeable action. If reason holds on both sides, the outcome will be settled sooner rather than later. If not, the rush into safe havens will still be warranted later on. Until then, we suggest taking the current imponderabilities as another slippage while markets climb the wall of worry.
Norbert Rücker is the Head Economics and Next Generation Research, while Carsten Menke is the Head Next Generation Research at Julius Baer.
