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The most dangerous thing about tariffs is how simple they sound. What could be plainer than slapping 25 per cent levies on all goods from Canada and Mexico? Yet the impact and the implementation of such trade measures are devilishly complicated. That might explain the market’s muted response.
Some stocks followed a predictable script on Monday after tariffs were announced. Carmakers’ shares fell, for example. That makes sense: their vehicles comprise parts that cross borders, in some cases several times, before reaching the dealership. Stellantis is one company that ships kit between facilities on either side of the US-Canada border.
Then there are companies that buy now-pricier goods from China and sell them to US consumers. That would include electronics retailer Best Buy, or budget outlet Dollar Tree. They now face the unenviable decision between how much of these increased costs to swallow and how much to pass on to consumers — at the risk of incurring the wrath of President Donald Trump.
For corporate America more broadly, further discomfort awaits. Trump’s tariffs have nudged the already strong dollar even higher. That, in itself, isn’t a surprise. A study of Trump’s last presidency suggested that tariffs on China pushed up the dollar, and pushed down the renminbi. Citigroup strategists reckon the latest tariffs justify a 3 per cent bump.
That’s a drag for companies — from internet search providers to coffee chains — that receive a large share of their revenue and earnings in foreign currencies. It’s as if Trump had slapped a tariff on their overseas earnings.
Technology, food and household goods are the most affected, Morgan Stanley strategists reckon; telecoms and utilities the least. The Wall Street bank also found that stocks with lower sensitivity to dollar earnings have outperformed their peers since September.
All this augurs an adjustment rather than a crisis. The 1 per cent fall in the S&P 500 index by late morning — after Mexico received a one-month reprieve — doesn’t even make it into the 20 worst trading days of the past year. Perhaps the worst has already been priced in, since Trump has made no secret of his plans. BNP Paribas economists note that tariffs are already factored into baseline economic forecasts.
But it may equally be that investors don’t know where to begin. Supply chains differ even between companies that are close peers. A trade war, especially when inflicted on supply chains still recovering from a pandemic, is uncharted territory. One of the enduring features of American exceptionalism is that investors flock to US assets in times of chaos, even when Uncle Sam is the cause of that disarray.
Either way, the market’s reaction — basically no more than a shrug — is itself a risk. Had share prices slumped, it would have sent a message to the president that slapping on tariffs isn’t as straightforward as it sounds. As it is, investors’ relative inaction gives him little reason to show restraint.
john.foley@ft.com