After announcing substantial tariffs on its top three trade partners, the United States may be on the brink of igniting a global trade war.
The most recent directive, signed by President Trump, stated that all goods imported from Canada and Mexico will be subject to a 25% tariff, except for Canadian energy products, which will incur a 10% tariff. A 10% tariff has also been imposed on all imported goods from China.
Although tariffs between the US, Canada and Mexico have been paused for one month, we are still analyzing their potential consequences as the situation evolves.
The lower tariffs on Canadian energy products result from the United States’ dependence on Canadian oil, with approximately 60% of the oil imported by the US coming from Canada. Although the tariffs on Canadian energy are lower than those on other imports, they could still lead to a rise in fuel prices. Retaliatory measures from Canada might make things even worse.
The tariffs, intended to reduce illegal migration and the influx of fentanyl into the US, will have significant economic consequences, particularly for American consumers. When President Trump imposed tariffs on China during his first term, economic studies indicated that most of those costs were ultimately borne by American consumers. This scenario is likely to recur because of the current tariffs.
While no official announcements have been made, the European Union is preparing for similar trade actions.
An increasing number of countries, including American allies, are forming trade agreements as the Trump administration causes the US market to become more isolated. In just the past two months, the European Union has finalized three new trade deals, including the new EU-Swiss single-market trade deal, the recent agreement with Mexico to strengthen an already thriving relationship, and the new deal with members of Mercosur — a bloc that includes Argentina, Brazil, Paraguay and Uruguay — that would establish one of the largest trade zones in the world and would be the European Union’s biggest trade agreement ever.
Nonetheless, the US remains the European Union’s second-largest trade partner (after China), so the implications of possible tariffs on exports to the US market are still considerable. Certain sectors will be affected more than others, with Germany’s automobile industry likely facing a disproportionate impact.
The US is a major market for EU-made cars. A proposed 25% tariff on EU motor vehicle imports could significantly reduce the competitiveness of European cars in the US market, leading to a sharp decline in exports.
For the European pulp and paper industry, the US accounts for close to 15% of all exports. Graphic papers and boxboard are the segments with the largest exposure, as the US accounts for up to 30% of European trade.
A decline in EU exports could lead to decreased demand for euros, potentially causing the euro to weaken further against the US dollar. Slower economic growth and rising cost inflation in European manufacturing may also contribute to the euro’s decline.
While some may believe that a weaker euro could benefit European exports, it’s essential to consider that the United States is the EU’s second-largest trading partner. Therefore, the overall impact of potential tariffs might adversely affect the European trade balance even more.
Additionally, Europe is a net importer of energy — more than half of domestic consumption is imported from abroad — and raw materials, which means that a weaker euro will increase the cost of these imports, further diminishing Europe’s global competitiveness. The primary raw materials at risk include energy sources such as coal, natural gas, and oil, as well as iron ore, copper, aluminum, nickel, lithium, soybeans, palm oil, wood and pulp, cotton and rubber.
Although unpredictable, the board is set and bets are high. It is extraordinary to realize how just how fragile the global markets truly are. The actions of one single country can easily jeopardize the delicate global trade balance and risk reigniting inflation.
At Fastmarkets, we continuously monitor developments around trade and assess their impact on our forecasts and analyses. Speak to one of our experts to find out more.
