Trump Dials Back Most Tariffs but Targets China

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The steepest tariffs are on hold, for now. Investors are breathing a sigh of relief. But a new U.S. trade regime is still here, with broad 10% duties on imported goods, higher for cars and key metals. And most importantly, the trade war with China is escalating.

President Trump seems to have pulled back from his plan to levy higher tariff levels on a country-by-country basis, despite avowals from some of his advisors that these were not up for negotiation. Turmoil in financial markets, particularly the bond market, may have prodded him to think again. Instead, he says the individual rates are delayed 90 days while the U.S. seeks trade deals with individual countries.

The one glaring exception: Tariffs on China are soaring to 145%, even higher than Trump first announced. Beijing had hit back at Washington with its own, higher rates, so Trump is singling out China as a special case.

Amid the chaos, here are our takeaways:

• The 90-day pause could become permanent when it comes to higher, country-specific duties. Trump had been playing hardball, threatening rates as high as 50%, to induce trade partners to do more than lower rates on U.S. goods. He wanted them to vow to buy more American goods, build factories in the U.S. or take other steps to narrow the trade surpluses many run with us. But those concessions could be very hard to get, and meanwhile, financial markets were panicking about the potential damage to the economy. Trump relented, it seems, opting for a 10% flat rate and time to get trade partners to curb duties on U.S. goods.
• Trump is likely to get some concessions he can tout in the coming months. But he will probably settle for less than he wanted on “buy U.S.” promises.
• When it comes to China, there is little sign of any reconciliation. Beijing can’t be seen to be submitting to Trump, even if sky-high U.S. tariffs cost it dearly. We could be entering a trade cold war, featuring two rival superpowers, and smaller countries having to choose whether to align with the U.S. or China.
• Trade with Canada and Mexico — two key trade partners — is up in the air. Trump’s earlier 25% duties remain in place for goods that don’t comply with the three countries’ free-trade pact, which is up for renegotiation next year.
• On the economic front, we see GDP growth slowing and inflation rising as a result of the 10% blanket tariffs, plus higher duties on cars, metals, etc. GDP will eke out a small gain, while inflation could hit 4%. That puts the Federal Reserve in a bind, forcing it to choose whether to cut rates to boost growth but fan inflation. We suspect the Fed will stand pat at its May meeting, but cut rates later in the year.
• On stocks: Expect continued volatility. Don’t panic-sell, but caution is essential now