Reciprocal tariffs.. Yay or nay?

“If they charge us, we charge them.”

That is the premise that Trump is going with in wanting to impose reciprocal tariffs, in particular the US’ main trading partners with those that have “relatively large trade deficits with the US and apply relatively high tariffs”.

The 25% tariffs on steel and aluminum was largely anticipated to go through, as it doesn’t require another investigation. He already did that back in 2017. But again, there’s still some time to negotiate exemptions as the tariffs will only go into effect on 4 March.

In this thread, let’s focus on reciprocal tariffs though. Trump has touted he will make an announcement on this either later today or tomorrow.

The details remain scarce and it’s not even a certainty that he can push this through without any hiccups domestically. Adam had laid out a good scenario last week here.

Trump does have power to negotiate changes to US trade policy but it isn’t limitless. I would assume Congress will need to step in on a matter as big as this one but we’ll have to see what the White House has to say first as well.

The easiest proclamation is to label it under the premise of a threat to “national security”, as he did with steel and aluminum tariffs. But it’s not going to fly on this surely as it involves all trade with so many countries.

There’s a case to be made for singling out the likes of China, Canada, and Mexico perhaps. But “national security” on reciprocal tariffs in general? It’s a tough sell.

Besides that, logistically it will be an absolute nightmare to get all of this done quickly.

The other point in all this is that reciprocal tariffs also targets a lot of key US allies and they will be hit hard. The likes of Japan, India, and South Korea especially will be dealing with a tough change in trade environment.

So, does reciprocity also mean lowering tariffs altogether? Or is Trump just going to stick with tariff increases to make it fair game?

And what about the reaction after? The EU certainly won’t be shy in retaliating and I figure Canada and China will also issue quick responses to any stunts that Trump is looking to pull here.

For now though, markets are evidently not all too frightened. Wall Street extended gains in trading yesterday, even if US futures might be a little lower today. The dollar is steady but not really seeing standout gains to start the new week. As for the bond market, there is some selling which saw 10-year yields creep back up to near 4.50%. So, that will be one to watch in case of anything.

But at the balance, the fear gauge among broader markets is not as high as one would think. At least not when compared to the level of uncertainty and alarm before Trump’s inauguration last month.

This suggests that traders are learning from their lesson in the past two weeks. Trump wants to make a show of all of this and go big in the opening salvo. Things will then get watered down before a promise of negotiations, with a chance for him to eventually claim that he has made “the biggest and best trade deal ever” for the US. We’ve seen this before.

But even so, there’s still the risk of him going off the rails before pulling back. That’s something markets need to be wary about and not being too complacent. The reciprocal tariff headlines and the retaliation could well still hit risk trades hard in the next few days. But at this stage, this looks to be a market that is trying hard to sniff out any bluffs or watered down approach to turn sentiment around.

In other words, it’s going to be tough to keep risk trades down for long unless Trump is really promising trade wars for longer. However, as long as there’s room to talk, market players are likely to look at all of this with a glass half full approach instead. So, we’ll see what the headlines will bring in the next few days.

This article was written by Justin Low at www.forexlive.com.