We share with members an analysis by Charles Schwab that looks at the four potential reasons why the market is dismissing the threat of tariffs and reasons for caution, despite the market responding positively to Trump’s first week in office.
- No Day One tariffs enacted as had been pledged.
Despite the fact that President Trump told reporters he was planning to enact the 25% tariffs against Canada and Mexico on February 1, there was no immediate action on tariffs and they were not mentioned in Trump’s inaugural address.
But there are still risks the market may be ignoring. Notably, President Trump's comments and the presidential memorandum on trade policy note that several federal agencies were instructed to review a broad range of trade issues and to report back with recommendations by April 1.
- U.S. energy exports offered as a way for Europe and China to avoid tariffs.
President Trump and Scott Bessent, his nominee for Treasury Secretary, have suggested that Europe and China could avoid import tariffs if they buy more U.S. energy.
Producing enough energy to narrow the trade gaps may take substantial energy price inflation in the U.S., something the administration may be wary of facilitating.
- The new political leadership in Europe and Canada are more like Trump, easing the path to cutting a deal.
Markets may be taking comfort in the rising potential for warmer cross-border relationships. Accommodative personalities may make trade talks go more smoothly but doesn't guarantee resolution to the focus around Trump's trade policies—the massive U.S. trade gap.
- Global trade survived Trump 1.0.
If history is any indication, the current tariff proposals may simply be negotiation tools leading toward agreements with China and other countries, and potentially much less disruptive to economic growth, inflation, sales, and operations of multi-national corporations. The market seems to believe that Trump will continue to use dramatic tariff announcements as a tool of statecraft to extract actions or concessions, rather than tools of economic policy. The risk? Trump 2.0 may differ significantly from Trump 1.0.