The Art of the Deadline
The Art of the Deadline
US President Donald Trump's self-imposed 1st August deadline for implementing "reciprocal tariffs" has passed, with a number of key tariff announcements made in the preceding week. The administration's focus is on resetting its global trade relationships through a series of new agreements on tariffs.
The most notable developments were with some of the United States' largest trading partners. A new framework agreement was announced with the European Union, which the White House hailed as a "generational modernisation". Under this deal, the EU will accept a 15% tariff on most goods it exports to the US. In exchange, the EU committed to major purchases of American energy products and to making new investments in the US in the period through to 2028.
Similar agreements were also reached with South Korea, Thailand, and Cambodia. Notably, South Korea also agreed to a 15% tariff, a reduction from a previously threatened rate of 25%.
While some countries secured these new deals, others face higher tariffs. President Trump signed an executive order imposing a range of new rates on over 60 countries, which took effect on 7th August. Nations that failed to reach an agreement will face tariffs ranging from 10% to over 40%. For instance, Switzerland, which did not secure a deal, will now see a 39% tariff on its goods. Separate orders also raised tariffs on imports from Canada to 35% and from Brazil to 50%, with the White House citing justifications such as a failure to cooperate on curbing illicit drug smuggling into the US.
These trade actions have garnered a range of reactions. The agreements with the EU and others brought a sense of relief to markets, but the new tariffs elsewhere have created fresh uncertainty. Economists and analysts are concerned that these tariffs could lead to higher prices for American consumers, leading to slower economic growth. This marks a significant shift in US trade policy from free trade to a system of reciprocal tariffs and bilateral agreements. The ultimate impact remains to be seen as negotiations continue with other major trading nations, including Mexico and China.
The Effective Tariff Rate imposed by the US has jumped in recent months and is expected to climb further following the new deals and recently imposed tariff rates:
Source: Artorius, Bloomberg
Automotive Industry Impact
A company that one might expect to be a beneficiary from the new tariff regime would be General Motors (‘GM’) given it is a US-based company. However, the days when an imported car was synonymous with a foreign brand are long gone. This is particularly evident with GM, which manufactures overseas and imported more cars into the US last year than any other car manufacturer. Nearly half of the vehicles GM sold in the US last year were built abroad. Going forward, its strategy of producing low-cost vehicles in countries like South Korea is now in jeopardy as a result of the new tariffs. President Trump has imposed 25% tariffs on imported cars, and GM estimates this will cost the company up to $5 billion this year, significantly impacting its profitability.
GM and other American car manufacturers, such as Ford, which itself is facing a $2.5 billion tariff hit, are scrambling to manage these new costs, either through price increases, cost-cutting measures, or by moving some production to the US. The tariffs highlight how deeply integrated the global automotive supply chain has become, with US car manufacturers now being some of the largest US importers. GM's exposure is particularly high due to its reliance on its South Korean factories. While Trump's goal is to increase domestic car production, experts warn that this may not lead to a jobs boom.
Car manufacturers are likely to increase automation to offset higher labour costs in the US. If they cannot entirely mitigate higher labour costs, then retail car prices would need to be higher to maintain margins. However, this then potentially adds to the ongoing affordability crisis for new cars where demand is under pressure. The ultimate effect of these tariffs on the automotive industry and American consumers remains uncertain but it does not look likely to be a major positive in the short term at least.
Earnings and Market Update
The US central bank has once again kept interest rates unchanged, despite pressure from President Trump to lower them. The Federal Reserve's (Fed) decision comes after the US economy grew at an annual rate of 3% in the second quarter, following a contraction in the first three months of the year. The Fed remained cautious, pointing to inflation which, at 2.7% in June, is still above its 2% target.
In stock markets, several of the major US technology companies reported strong earnings, which in turn was reflected positively in their share prices. Microsoft and Meta saw significant gains, with Microsoft's valuation reaching a new high.
In contrast, Amazon's shares dropped after the company issued weak guidance for its future profitability, despite a strong earnings report. Apple also posted a modest share price rise after its results exceeded expectations. European markets, however, have seen a more mixed earnings season, with several companies, including Adidas, HSBC and Mercedes-Benz Group seeing their share prices fall sharply after missing earnings forecasts.
The latest tariff deadline from President Trump further emphasises the economic uncertainty that has been the hallmark of his administration. While this time markets currently appear comfortable with the outcome, it remains to be seen what the outcome of negotiations with China will be and the long-term effect of these increased tariffs on both domestic US companies and those overseas who export to the US. Having a risk appropriate, diversified portfolio remains as key as ever given the unpredictability of the Trump administration.
Josh Young de Ferrer
Portfolio Manager
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