Socrates and trade tariffs

• Enguerrand Artaz
  Fund Manager
  LFDE

These raised tariffs on products imported from Mexico and Canada to 25% – with an exemption for Canadian oil, taxed at the lower rate of 10%. The US President added an extra 10% to tariffs on Chinese products. A few days and a number of calls between heads of state later, and these tariffs were suspended for Mexico and Canada, in return for a drastic increase in border controls, in particular, to combat drugs trafficking. Nothing doing on the Chinese front, but the response from Beijing has been extremely moderate and a conversation between Donald Trump and Xi Jinping should take place shortly.

To this we must add the 25% tariffs imposed on Columbia – swiftly cancelled after Bogota ultimately agreed to take back all of its citizens deported from the US without restriction – as well as the reiteration of the threat of trade tariffs on Europe, but without any mention of figures or a precise scope. In total, at this stage, US trade policy has in reality barely changed – only the hike in tariffs on Chinese products is today in effect. That said, this series of events is not without consequences for the economic outlook.

The various indicators¹ measuring the level of uncertainty in global trade, particularly with regards to the US trade policy, have skyrocketed to levels similar or even higher than those seen at the peak of trade tensions in 2019. This is a good illustration of the situation in which many companies – particular those in the US – find themselves today: in a perfectly Socratic position, where the only thing of which they can be certain is that they know nothing. Whereas the election of Donald Trump with his supposedly pro-business stance provoked an uptick in optimism in the US corporate sector, as we can see from several confidence surveys, this period of ambiguity ushered in by the White House could change the playing field considerably.

Of course, uncertainty is an integral part of economic life. But if it is exacerbated, the impact can be powerful. Investments cancelled or postponed, new hires frozen, projects delayed, strategies sent back to the drawing board – the traditional consequences of a lack of visibility on economic conditions for companies are already kicking in, to judge by merger and acquisition activity, which hit its lowest level in a decade in January. This is a serious matter at a time when continued US exceptionalism – such a beacon in recent years – is being called into question. All the more so, as the rise in uncertainty will affect countries other than the US. It may affect all of global trade, which would prove detrimental, especially at a time when the global industrial cycle is finally showing signs of recovery after two years in the doldrums.

As for the Trump administration, it has little to gain from carrying on this game of liar’s poker for too long. The customs revenue expected from these tariff hikes – the extent of which is doubtful – will not materialise until the new tariffs are actually implemented. At the same time, a slowdown in activity driven by uncertainty would have a swift negative impact on fiscal balances. A lose-lose gamble.

Lastly, uncertainty is also likely to depress financial markets. Whilst they have so far proven extremely resilient in response to these issues, if this uncertainty continues, it could affect investor sentiment. For markets – hardly followers of Socratic precepts – an unpleasant situation that is known about, i.e. a fixed and definitive hike in trade tariffs – is often better than ambiguity fuelled by political volatility.

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The opinions cited are those of the fund manager. LFDE shall not be held liable for these opinions.

Final version of 7 February 2025 – Enguerrand Artaz, Fund Manager, La Financière de l’Échiquier (LFDE)

¹Trade Policy Uncertainty Index, by Caldara, Iacoviello, Molligo, Prestipino & Raffo; Economic Policy Uncertainty Index by Baker, Bloom & Davis