No sooner had historic 25% tariffs on imports to the US from Canada and Mexico come into force on Tuesday than the commerce secretary, Howard Lutnick, suggested the policy might be softened. Hours later, Donald Trump told Congress that the tariffs were “protecting the soul of our country”.
They say it’s the hope that kills you, but for investors trying to make sense of the Trump administration’s economic policies, it’s the uncertainty.
The president is promising a new “golden age”, but more sceptical analysts are starting to warn instead about the risks of a “Trumpcession”.
Not only has the president embarked on an extraordinary trade clash with neighbours, prompting retaliatory tariffs from Canada and warnings of sharp price rises from US retailers on everything from avocados to cars, but this confrontation is taking place against a background of corrosive instability.
The tariffs have been on, off and on again – with measures against the EU still in the works – at the same time that Trump’s right-hand man Elon Musk has been working to dismantle the federal bureaucracy.
The direct impact of the layoffs made so far by Musk’s “department of government efficiency” (Doge) appear to be relatively small, but its move-fast-and-break-things approach, which appears to include tearing up contracts and pushing the boundaries of employment law, underlines a sense of chaos.
As the US journalist Mike Masnick, who has followed the use of similar tactics in the tech industry, put it in his Techdirt blog on Wednesday, investors who hoped Trump policies would be pro-business are “learning a very expensive lesson about the difference between creative destruction and just plain destruction”.
It is also unclear to what extent Trump will try to pressure the independent Federal Reserve as he presses for lower interest rates.
These and other concerns – including questions about how the president will fund his jumbo tax cut plans – appear to have spooked US equity markets in recent days.
The US is a huge and not very open economy (trade was worth 24% of its GDP in 2023, according to World Bank data, against 64% for the UK, for example), so the direct hit to growth of the disruption created by tariffs may be limited – and less than for Mexico or Canada.
But if companies become more cautious about investing, and consumers about spending, because of the prevailing climate of uncertainty, that could have a wider impact.
In the latest Institute for Supply Management report on manufacturing, for example, respondents repeatedly referred to the lack of clarity surrounding tariffs. As one transport company put it, “customers are pausing on new orders as a result of uncertainty regarding tariffs. There is no clear direction from the administration on how they will be implemented, so it’s harder to project how they will affect business.”
Amid headlines about tariffs leading to price rises, US consumer confidence last month recorded its sharpest monthly decline since August 2021, according to the long-running Conference Board index.
In the UK, the chancellor, Rachel Reeves, has said Britain’s economy will be hurt by a G7 trade war even if Trump exempts the UK from tariffs.
The swirling fears about a potential US downturn also appears to be weighing on the dollar. Economists would usually expect the currency to strengthen when tariffs are imposed, dampening the rising cost of imports. And global volatility usually favours the safe-haven currency.
But the greenback has been declining on foreign exchanges despite the tariffs and the fear factor in markets. That has caused economists to ask what seemed – until recently – to be an unthinkable question: could the US currency be losing its status as the world’s reserve currency?
Trump may yet pull back from the brink on tariffs, in exchange for concessions from Mexico and Canada, and could quietly shelve plans to punish the EU. But his whole modus operandi is unsettling markets.
Until recently, many investors were committed to an upbeat narrative of “US exceptionalism” and hoped the president’s plans for tax cuts and deregulation would extend the US’s tech-powered boom. The exceptionalism Trump has delivered, however, is not the kind they were looking for.
