The markets were not willing to take US President Trump at his word on specific tariff threats against Mexico, Canada, and China ahead of the weekend, says Saxo Chief Macro Strategist John J. Hardy.
But from the outset in his second term as President, Trump delivered exactly what he said he would and now markets must make significant adjustments to adapt to this new reality, Hardy adds.
Trump has placed duties of 25% on imports from Mexico and Canada, and a 10% tariff on all imports from China. The tariffs come into effect on Tuesday (EST).
Canada and Mexico have both since announced tariff countermeasures.
Trump also said at the weekend that he will “absolutely” also impose tariffs on the European Union, saying that “we’ll be doing something very substantial with the European Union. We’re going to bring the level up to where it should be”.
Wall Street tumbled late on Friday with the announcement of the tariffs, which led the ASX to tumble at open on Monday (3 February), with several commodities taking a beating and gold remaining in record territory as investors seek security in the volatile market, as reported by Mining.com.au.
The S&P/ASX 200 retreated 159.7 points, or 1.87%, to 8,372.6 points as of 10.30am AEDT, while gold was fetching over US$2,800 ($4,551) an ounce.
Saxo’s Hardy says the market failed to take these specific threats at face value even up to the Friday close last week after countless tariff threats in Trump’s first term as President weren’t delivered on.
“And (also) perhaps after he recently climbed down from the threat of imposing 25% tariffs against Colombia … if these tariff moves and countermoves from US trade partners are sustained, we are effectively in a trade war with all the associated fallout for growth and prices and disruptions to supply chains and companies,” Saxo’s Chief Macro Strategist says.
One company who did see the Trump tariffs coming, however, is Austin Engineering (ASX:ANG). Commenting on the announcement on the weekend by the US Government, Austin is confident of powering through after reorganising its US supply chains months ago in anticipation of any such moves by the Trump administration.
Over the past nine months, Austin completed a repositioning of its US business to ensure it would not be directly affected by tariffs imposed on goods imported from Mexico, or exports from the US to Canada, if Canada was to enforce its own tariffs in response.
The company says this has primarily included the development of a new truck tray sub-assembly supply chain route using Canadian contractors for sub-assembly builds. The sub-assembly (part-built) kits are transported to existing contractors for final assembly onto the customers.
Austin has undertaken final-assembly builds in Canada for several years with contracting companies located close to customer sites for final assembly and delivery of its products. However, the sub-assembly builds are a new supply chain route developed over several months to ensure that quality, cost and IP needs are met.
In the past two months, Austin has built 10 truck body sub-assembly kits using two Canadian-based contractors. The company says it is confident the sub and final-assembly partnership arrangements will be sufficient to meet its customer orders and demand in Canada.
Until recently, truck body sub-assemblies were built in Austin’s manufacturing facility in Casper, Wyoming. Austin’s decision to build Canada-bound truck trays in Canada will free up capacity at the Casper facility to meet current increased demand in the US.
Austin previously imported some sub-assembly trays from Mexico to the US but ceased this supply chain route several months ago. Austin retains sub and final-assembly contractor relationships in Mexico for supply of truck trays in that region, if required.
CEO David Singleton says the company’s decision several months ago to reorganise Austin’s US supply chains to avoid tariff risk was timely and effective.
“We expect the cost impact of this change in supply chain to move some elements of production to Canada to be broadly cost neutral. This is due to the increase in supply costs being offset by lower freight costs and lower steel costs in Canada compared to the US,” Singleton says.
Saxo’s Hardy says the market reaction will be quite negative and many likely believe that these tariffs could be lifted at a moment’s notice if Trump feels like his point has been made and sees trade partners responding in the desired direction.
Goldman Sachs has already publicly been saying it sees the Mexico and Canada tariffs as likely proving short-lived.
Yet Hardy notes that if they are not lifted the chief longer term risk is one of stagflation – weak growth with higher inflation levels.
“How much the market fallout continues to deteriorate (beyond a significant correction of perhaps several per cent in stock markets) depends on whether the new tariffs are quickly rescinded because an agreement is reached, or whether this devolves into a tit-for-tat cycle,” he continues.
“How much the market fallout will continue to deteriorate beyond a significant correction of perhaps several percent in stock markets, for example, depends on whether the new tariffs are quickly rescinded because an agreement is reached or whether this devolves into a tit-for-tat cycle that descends into an all-out trade war.”
The tariffs versus Mexico, Canada, and China were delivered as the Trump administration complained that Mexico and Canada were not doing enough to stop illegal immigration and the flow of drugs into the US, with China also blamed for its role in the flow of fentanyl into the country.
The US will impose 25% tariffs on most imports from Canada, with only 10% tariffs to be imposed on crude oil and other energy resources, the largest import category from Canada to the US.
Additionally, the US will impose 25% tariffs on all imports from Mexico. Additional 10% tariffs will be imposed against China on all imports.
In response, Canada will assess 25% tariffs on US$105 billion of US imports, starting with tariffs on US$20 billion of imports in alcohol, coffee, clothing, furniture and household appliances and later on US$85 billion of imported cars and trucks, agricultural products, steel, aluminium and aerospace products.
Mexico has responded that it will also respond with tariff and non-tariff measures, with details not yet forthcoming.
Hardy notes that China denounced the tariff increases, saying they violated international trade rules and that it will challenge the tariffs at the WTO, and also declared it would take “countermeasures” that are not yet specified.
Write to Adam Orlando at Mining.com.au
Images: Austin Engineering & Stock
