More clarity on these issues is expected after the new administration takes office on January 20th, almost a month from now. However, governments and businesses are continuing to prepare for potential changes. Let’s examine what has been happening.
President-elect Trump proposed 25% tariff on all imports from Mexico, which prompted a phone conversation between Trump and Mexican President Sheinbaum. Comments from both sides that the call was a success led the peso to rebound after having fallen sharply on news about proposed tariffs.
Also, the US Mexico Canada Agreement (USMCA), the free trade agreement negotiated by the first Trump Administration, is set to be renegotiated in 2026. Trump has proposed substantial tariffs on imports from Mexico, including on automobiles and parts from Mexico. Such changes could potentially disrupt the established automotive supply chains in North America. Most cars assembled in the United States include a substantial amount of value stemming from elsewhere in North America and beyond. Also, roughly one quarter of Mexico’s exports to the United States involve transportation equipment.
Trump also proposed a 25% tariff on Canada. Canadian Prime Minister Trudeau implied that, while he favors retention of the three-country agreement, he is willing to develop a bilateral relationship if necessary. He said that “pending decisions and choices that Mexico has made, we may have to look at other options.”
Meanwhile, in anticipation of tariffs, it is reported that exporters in Mexico, Canada, and China have been frontloading exports. Plus, many shippers have already been frontloading exports in anticipation of another port strike in the United States. This has the potential to create new bottlenecks and higher costs. On the other hand, data on inventory accumulation by retailers and wholesalers in the United States suggest that there has not yet been an excessive surge in imports. Moreover, exporters recognize that, even if tariffs are announced under the new administration, it may take time before they are fully implemented.
- Some leaders in Europe have expressed concern about the potential for reduced trade between the United States and others, which could cause much of the world’s excess capacity to be aimed at Europe. The vice president of the European Commission, Stephane Sejourne, said that “I fundamentally believe that Europe has everything to gain from being open to the world.” But “when China says, ‘Made in China’ or the US says ‘America First,’ we must say: ‘Made in Europe’ or ‘Europe First’.” He added that “if all the world markets close, the only remaining open market cannot be the European market. If the United States closes to Latin America, closes to India, closes to China, the European market cannot be the destination for all the overcapacities in the world, otherwise we will find ourselves in a situation of short-term economic crisis.”
Sejourne’s comments demonstrate Europe’s perceived vulnerability to potential trade policy changes by other major countries. The EU has been an active participant in the reduction of global trade barriers over many decades, although many barriers remain, even within Europe. Europe has been a strong exporter to the rest of the world, including to the United States and China. Thus, restrictions imposed by either could be damaging to Europe’s economy. Sejourne said that the EU will act to support key industries threatened by foreign competition, but that the EU is not interested in having a trade war. Rather, it wants to be able to compete vigorously in global markets.
- Several central banks have lately taken actions that, in part, were driven by revised expectations about the global economic situation in the wake of the US election. Here is a look at what has happened.
— Recently, the central bank of Brazil increased its benchmark Selic interest rate by 100 basis points. This followed a 25-basis-point increase in September and a 50-basis-point increase in November. Brazil now faces accelerating inflation after a period of stability. In part, this likely reflects a decline in the value of the Brazilian currency against the US dollar, a trend that accelerated after the US election and which leads to rising import prices.
Moreover, investor expectations for Brazilian inflation have increased as well. Since the US election, the 10-year breakeven rate for Brazilian inflation has increased by roughly 100 basis points. In other words, investors now expect that the expected policy mix of the US government (tax cuts and tariffs) will likely depress Brazil’s currency, thereby boosting average Brazilian inflation by one percentage point during the coming decade. That, in turn, explains why the central bank has taken such drastic measures. The interest-rate increase is likely meant to both fight inflation and stabilize the value of the currency.
— In Switzerland, however, the concern is that potential US tariffs could hurt Swiss exports. Plus, there is a concern that continued easing of monetary policy by the neighboring European Central Bank (ECB) will reduce the export competitiveness of Swiss products in the Eurozone market. Thus, a cheaper Swiss currency is seen as needed. Consequently, the Swiss National Bank (SNB) cut its benchmark interest rate this week by 50 basis points. This followed three 25-basis-point cuts over the last three months.
Switzerland’s benchmark interest rate is now 0.5%. Moreover, the governor of the SNB recently said that negative rates are conceivable. However, he added that the recent 50-basis-point move makes that less likely. The key issue is the value of the currency and its impact of export competitiveness. Interest rate policy is meant to influence the exchange rate.
— In Canada, the central bank recently cut its benchmark interest rate by 50 basis points. This took place because of confidence that inflation is moving in the right direction, as well as concern about the weak state of the Canadian economy. However, the size of the cut likely indicates angst over the potential impact of US trade policy.
The incoming US administration has talked about the possibility of significant tariffs on imports from Canada, as well as tariffs on all imports from all countries. Either way, the impact on Canada would likely be substantial. Aside from retaliatory tariffs, the most likely way to deal with tariffs would be for Canada to suppress the value of its currency, thereby boosting export competitiveness and offsetting the impact of tariffs. Thus, a more aggressive easing of monetary policy can cause a currency depreciation.
— Finally, the European Central Bank (ECB) cut its benchmark interest rate recently by 25 basis points. Even absent concerns about a change in US policy, it is likely that the ECB would have taken this action. Yet it is likely that ECB leaders are giving thought to the potential impact of US policy on their decision-making. At her press conference, ECB President Christine Lagarde said that the central bank’s baseline forecast assumes no shift in US trade policy. Yet that is not necessarily realistic.
If the United States imposes significant tariffs on imports from Europe, it will likely lead to a depreciation of the euro. The ECB might also choose to accelerate monetary easing, both to facilitate a depreciation and to boost domestic demand. Moreover, if the United States imposes major tariffs on China, it might lead to an increase in Chinese efforts to export to Europe. That, in turn, might affect the trajectory of ECB policy, especially if the EU responds with restrictions on imports from China.
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