Realities of Trump’s trade war

Donald Trump’s love of tariffs is as well-known as the incoming US president’s capriciousness, Bloomberg reports.

For everyone from CEOs and mom-and-pop businesses to Wall Street investors and foreign governments, gaming out the path from protectionist campaign rhetoric to policy reality is proving tough, leaving the outlook fraught with uncertainty.

Bloomberg Economics has mapped out a plausible scenario for what lies ahead. It’s admittedly a plot sketched without a high degree of confidence given the unpredictability of Trump himself. Shaped by conversations with officials who helped deliver Trump’s first-term trade policies, an understanding of how the battle plans were constructed, and an assessment of the political and economic realities, it’s intended to help stakeholders in the $30 trillion global trading system navigate the turbulence.

Part of the challenge: separating the drama of Trump’s free-wheeling public statements -- like his currency-rattling tariff threats to Mexico, Canada and China last week and a fresh warning to the BRICS economies on Saturday -- from the slower-moving processes by which tariffs are designed and enacted. The drama has started immediately. Tariffs may build more gradually.

On the road to his Nov 5 win, Trump suggested he would put a 60 per cent tariff on imports from China and a 10 per cent to 20 per cent fee on goods coming from anywhere else. The import taxes that he will deliver in office, however, seem likely to be sequenced and targeted to maximize negotiating leverage and tariff revenue while shielding US consumers from a return of the inflation that helped elect him.

Bloomberg Economics base case calls for three waves of tariff hikes, starting in summer 2025, with levies on China ultimately tripling by the end of 2026 and a smaller hike on the rest of the world -- focused on intermediate and capital goods that don’t directly impact consumer prices. The combined impact would be a tripling of average US tariffs to almost 8.0 per cent by the end of 2026.

If that’s how things play out, US imports and exports of goods will drop from 21 per cent of the global total today to 18 per cent, including a plunge in US-China trade. US growth gets dinged, inflation faces fierce cross currents from higher tariffs and a stronger dollar, bullish stock markets have a bearish hurdle to clear and unemployment rises. But the extreme effects of the sky-high universal tariffs Trump floated on the campaign trail are avoided.

Trump’s Truth Social posts last week threatened tariffs of 25 per cent on Mexico and Canada on his first day in office unless the countries crack down on migrants and fentanyl crossing the border, plus an extra 10 per cent levy on China if it doesn’t block exports of the opioid. Those actions would take overall tariffs to a similar level as envisioned in Bloomberg Economics’ scenario, and with the same emphasis on China.

Last week’s salvo is just the latest reminder of Trump’s unpredictability and the many paths tariffs could ultimately take. For the US economy, with automobile and other manufacturing supply chains crisscrossing the US’s southern and northern borders, the impact if Trump’s Truth Social threat is implemented would be severe.

There are caveats galore, starting with Trump’ s preference for attention-grabbing policies over sober ones. And there are numerous legal authorities that Trump could draw on to impose tariffs quickly once he returns to the White House, including by declaring a national emergency. But history shows Trump is equally wary about upsetting financial markets and investors who have so far proven keener on his agenda of tax cuts and deregulation than his tariffs. Then there is the matter of the team that will oversee the design and delivery of his tariffs.

Trump’s decision to pick Scott Bessent to serve as his next Treasury secretary has been read as a Wall Street-friendly choice to prioritize market stability over economic disorder -- not a barrier to tariffs but at least a strategic brake. The founder of macro hedge fund Key Square Group has signaled his backing for tariffs to serve twin purposes: raising government revenue to offset tax cuts and addressing global economic imbalances.

Then again, Bessent has also said Trump’s priority for the economy ought to be to boost US GDP growth above 3.0 per cent -- hard to do if tariffs disrupt supply chains and hit consumer wallets.

There are important questions, too, over whether Robert Lighthizer, a longstanding advocate of a wholesale rethink of the US approach to imports and China who implemented Trump’s original tariffs, will have a formal place in the new administration.

Trump last week picked Jamieson Greer, a longtime aide to Lighthizer and his former chief of staff, to serve as US Trade Representative. That suggests Lighthizer, who at age 77 remains the sharpest protectionist mind in US policymaking, may have to settle for having his protege in the administration rather than his own station.

Lighthizer was passed over for Commerce secretary, a job that went to Howard Lutnick, who lost a bitter fight with Bessent over the Treasury role. Lutnick’s announcement came with a curious addition from Trump -- that the Wall Street veteran would “lead our Tariff and Trade agenda” and oversee USTR. Yet Lutnick has little experience with US trade policy as CEO of bond trading firm Cantor Fitzgerald. A similar play by Wilbur Ross to have Commerce lead on trade during Trump’s first term quickly dissolved.

While the team’s power dynamics remain uncertain, a credible path forward for Trump’s tariffs is coming into focus. Under Bloomberg Economics’ scenario, the ratcheting up of tariffs in mid-2025 would use existing lists from the Section 301 investigation his administration launched in August 2017 and that the Biden administration used to retain tariffs on Chinese imports.

Initially, Bloomberg Economics’ expectation is that this path will lead to 15 per cent additional tariffs on a broad range of consumer products ranging from pinball machines to pajamas and ballpoint pens that were limited targets during Trump’s first term.

That would mean Trump’s first action would be to return tariffs to the levels proposed during his first administration before January 2020, when he signed what was called the “Phase One” deal with Beijing. It’s a plausible step given China has not lived up to the first deal and that it has an enforcement mechanism that can be easily triggered.

Such a move would be “wholly justifiable,” says Clete Willems, who helped implement Trump’s first-term tariffs from his position on the National Security Council and is now a partner at law firm Akin Gump. “It gives us the moral high ground in our conversation” with China.

For now the prospects for the discussions between Beijing and Washington don’t look good. Many in the US capital seem more eager to see tougher trade measures against China than any reconciliation. Whether Trump falls into that camp is an open question given his deal-making history.

If, as seems likely, talks fail, the Bloomberg Economics scenario calls for tariffs on other imports from China -- mostly capital and intermediate goods -- to increase in stages up until September 2026 with additional tariffs now at 25 per cent eventually tripling to 75 per cent on a targeted list.

Alongside those tariffs on China, Bloomberg Economics expects a 3.0 per cent additional tariff, first on intermediate goods and later on capital goods imported from the rest of the world.