How High Will Trump's Trade Agenda Soar in His Second Term?

Investors are grappling with the question of how aggressive President Trump's trade agenda will be in his second term and the ramifications of the tariffs he plans to impose on imported products.

Mixed Outlook on Tariff Severity

Trump has threatened tariffs significant enough to cost American families hundreds or even thousands of dollars annually. However, analysts largely doubt that he will implement such extreme measures.

Goldman Sachs analysts anticipate the White House will prioritize avoiding the economic and political risks associated with widespread tariffs. They predict that the threatened 60% tariff on Chinese imports will be significantly reduced, with agreements with trade partners negating tariff threats on imports from other countries.

Lessons Learned from Past Trade Wars

During his first term, Trump's on-off trade wars caused volatility in financial markets. Companies learned from these trade disputes by diversifying their sourcing and reducing their dependence on China.

Bank of America analysts expect slightly higher tariffs in Trump's second term but acknowledge that vulnerable companies have adapted since the commencement of trade wars in 2018.

Worst-Case Scenario: Full-Blown Trade War

The most severe outcome would be the implementation of Trump's full trade war plan, which would entail substantial tariffs on almost all imports. In such a scenario, trading partners are likely to retaliate with tariffs on American exports, increasing costs globally.

The Peterson Institute for International Economics estimates that Trump's proposed 20% universal tariff and 60% Chinese import levy would cost families over $2,600 annually in increased expenses and lost income.

Oxford Economics' Outlook

Oxford Economics forecasts a short recession and inflation surpassing the current 2.7% rate under a full-blown Trump trade war. Businesses would face higher operational costs, while consumers would experience price increases on various goods.

However, Oxford places the probability of this scenario at only 5%. Markets have remained unfazed despite concerns over tariffs, indicating confidence in Trump's willingness to negotiate.

Off-Ramps and Market Sentiment

Trump has hinted at potential concessions to address tariff threats. He has expressed willingness to reduce tariffs on key trading partners Canada and Mexico if they cooperate in addressing illegal immigration and drug trafficking. Additionally, he has suggested China could avoid further tariffs by suppressing fentanyl production.

As long as there are potential off-ramps, markets are unlikely to react negatively.