It’s been another week of tariffs in the headlines, though further carve outs from previously announced tariffs and reports that China is mulling over US proposals for talks has helped the mood
President Trump announced on Tuesday that the US would offer a two year reprieve on tariffs for auto parts imported for final assembly of cars and trucks manufactured in the US. Trump cast the move as “a little flexibility” to allow companies to move manufacturing to the US saying, ’we gave them a little bit of time before we slaughter them’.
The President spoke at a rally in Michigan marking his first 100 days in office [more on that in my video early next week] and said his tariff program would inspire a ’wave of growth’ and lure manufacturers back to the US. Trump took the opportunity to take another dig at the Federal Reserve but made no mention of any intentions to fire Jay Powell this time round, even though the President claimed, ’I know much more than he does about interest rates’. It’s also interesting to note that markets are second guessing the Fed’s moves, now pricing almost 100 basis points of rate cuts by the end of the year, which appears slightly counterintuitive in assuming that tariffs will slow economic growth but not increase inflation.
We are still in a holding period where the eventual size, scope and duration of tariffs remains unknown, but every data point is scrutinised to gauge the potential economic impact. There was more evidence of a jump in activity in the first quarter with a surge in imports as companies attempted to ‘front run’ the tariffs by accelerating the imports of goods into the US in advance of ‘liberation day’ at the start of April. The US trade deficit in goods reached a record high in March at $162 billion – double the average monthly level of the past decade. This was also highlighted in first quarter US GDP data, which showed an overall contraction at an annualised pace of -0.3% but within the data, imports climbed at an annualised pace of over 40%. Meanwhile, shipping data points to a notable slump in container vessels leaving China for the US, and bookings for standard size containers from China to the US down 45% year-on-year in April. Scheduled container ship arrivals into the Port of Los Angeles, the main conduit from goods from China, are down by a third year on year in the week to 4 May. Stock is also being held offshore, with ships waiting to unload at potentially lower tariff rates or goods being stored in bonded warehouses where duty is not [yet] paid. So, the question is whether we are now seeing spell of indigestion in shipping volumes after a strong first quarter, or an indication of a significant drop off in the movement of goods, with consequential supply chain impacts as inventories are drawn down and supplies begin to dwindle. Bloomberg reported that by the middle of next month, companies will begin to struggle to replenish inventories, which could lead to empty shelves, higher prices, and ‘covid-like’ shortages for some goods.
How the US administration reacts to any visible supply chain disruption and ‘empty shelves’ will be a useful insight into how deep the ideology around tariffs is embedded into the policy agenda. President Trump told ABC News earlier this week that Americans should not be surprised by the tariff regime, saying it is necessary to address the trade deficit and revive domestic manufacturing. ‘I said all of these things during my campaign… I said ‘you’re gonna have a transition period’. We’ve been ripped off by every country all over the world’.
What we are not yet seeing is any meaningful negotiations between the two main adversaries in this trade war – the US and China. It appears there is something of a standoff taking place but who will blink first? US Treasury Secretary Scott Bessent said Beijing should take the first step in de-escalating the tariff fight between the two countries. Bessent said, ’I believe it’s up to China to de-escalate because they sell five times more to us than we sell to them, so these 125% tariffs are unsustainable’. Bessent added ’I have an escalation ladder in my back pocket and we’re very anxious not to have to use it’. Bessent also claimed the US has put China ’to the side for now’ as it seeks trade deals with 15 to 17 other countries and he ’wouldn’t be surprised’ if a deal with India is the first to be announced. President Trump claimed President Xi had ‘called’ him, despite denials from Beijing that any talks to ease trade tensions had begun. Trump also claimed he had sealed ‘200 deals’ on trade, despite no agreements being announced. Trump told Time magazine that deals could be announced ‘over the next three to four weeks’. Earlier in the week the Chinese Foreign Ministry posted on X that ‘China and the US are NOT having any consultation or negotiation on #tariffs. The US should stop creating confusion’. News on Friday morning suggest that China is now ‘evaluating’ US proposals to start talks but their position remains unchanged in that they still expect tariffs to be scrapped before talks get underway. China has previously stressed that any negotiations would need to be held at a working level between the two countries and a tentative agreement would need to be in place before Beijing would agree to a phone call or meeting between the Presidents. Both the US and China stand to suffer economically if the current levels of tariffs are not pared back, but with talks not yet underway, the respective levels of stubbornness and willingness to endure economic pain will determine who initiates trade talks between the two economic superpowers.
President Trump will clearly want to get some deals over the line in the coming weeks, so for the potentially ‘low hanging fruit’ – countries such as South Korea, India and Japan, we may well see tariff levels come down. The UK may struggle to get anything beyond the global 10% baseline tariff which appears more permanent. Any agreements will likely be simple deals rather than anything substantial but will help the narrative currently boosting market confidence that we are on a path towards de-escalation. Progress may become more urgent should the US economic data begin to deteriorate, not least if the President’s approval ratings close the gap lower to consumer confidence data which is close to all-time lows. Normally the two measures are closely correlated.
The situation remains very fluid, and further announcements should be coming soon on sector specific tariffs. The range of outcomes remains wide, but another week of uncertainty just increases the risk that even if we see a de-escalation in the not-too-distant future, we will still see collateral damage across supply chains and the reality of higher prices and fewer goods certainly wont help the consumer’s mood. Our view remains that we will see tariffs ease from their current levels, but we are not going back to the ‘free trade’ environment enjoyed until ‘Liberation Day’ and the ultimate landing zone will be significantly higher than feared before the tariffs were unveiled at the start of last month. Risk appetite is certainly a lot more positive than it was at the start of April, but it remains a concern that we are yet to see any actual progress on the reversal of tariffs to justify this more benign market mood.
Source: Columbia Threadneedle Investments as at 02 May 2025
