The trade wars are back

Earlier this year, the U.S. Supreme Court struck down President Trump's tariffs imposed under the International Emergency Economic Powers Act (IEEPA), ruling that the president had exceeded the authority granted under the emergency powers statute.

As expected, that did not mark the end of the trade wars.

This Monday, the U.S. President signed an executive order imposing a 50% tariff on a broad range of Canadian goods, effective August 19, over “discrimination against U.S. exports”. 

Instead of relying on IEEPA, the administration turned to Section 338 of the Tariff Act of 1930, which allows duties of up to 50%, including a complete import ban, against countries that discriminate against U.S. trade. 

The good news is that the U.S. market barely reacted, including the Dow Jones. After last year’s experience, investors seem convinced that no one will actually go that far.

The bad news is that the administration appears to be preparing another round of tariffs as early as this week. According to reports, the U.S. is considering duties of 10–12.5% on imports from roughly 60 countries.

For that, besides Section 338, the president could refer to Section 122 of the Trade Act of 1974, which allows tariffs of up to 15% for 150 days during periods of economic imbalance; Section 201, which permits safeguard tariffs and import restrictions to protect domestic industries; Section 301, which allows the U.S. Trade Representative to impose tariffs against countries engaged in unfair trade practices; or Section 232 of the Trade Expansion Act of 1962, which authorizes tariffs on imports deemed a threat to national security.

If additional tariffs are announced, markets could eventually get nervous; however, as we’ve seen before, deadlines may be pushed back, and the administration’s tone could soften. 

Now, if that is combined with the Strait of Hormuz staying closed for longer and oil prices continuing to rise, inflation risks will increase, leaving central banks, including the Federal Reserve, with less room to ease monetary policy.

Considering these risks and the fact that such circumstances could cause Republicans to lose ground in the upcoming midterm elections, the base case is that trade wars will not go to extremes, but, of course, reality can surprise.