Key Takeaways
- Recent statements from former President Trump indicate “letters” concerning tariffs could be sent to as many as 12 to 15 nations, with a suggested deadline of 9 July for concluding new trade deals.
- The potential scale of these tariffs, reportedly as high as 70% for some nations, represents a significant escalation from the 2018-2019 trade disputes and introduces a material risk of stagflation.
- Sectors with intricate global supply chains, such as automotive, semiconductors, and consumer electronics, are most vulnerable, alongside retailers who rely heavily on imports.
- Investors should anticipate heightened currency volatility and the potential for retaliatory measures targeting iconic US industries, complicating the macroeconomic outlook.
The market lexicon may soon need to reacquaint itself with the art of interpreting geopolitical signalling, as recent pronouncements from Donald Trump suggest a significant and rapid escalation in US trade policy is imminent. Reports indicate that formal communications, or “letters,” regarding new tariff structures are prepared for a dozen or more countries, with a potential D-Day for new trade agreements set for 9 July. [1, 2] This development moves the needle from abstract political risk to a tangible and time-sensitive threat that demands immediate reassessment of portfolio exposures, particularly in sectors dependent on global trade flows.
While the precise details remain unconfirmed through official channels, the commentary points towards a more aggressive and broad-based approach than witnessed during the 2018-2019 period. The market’s muscle memory from that era—characterised by volatile swings, supply chain disruptions, and sharp sectoral rotations—provides a useful, if perhaps inadequate, template for what may lie ahead.
Deconstructing the Tariff Threat
The language being used is itself instructive. The term “letter” is diplomatically ambiguous, falling somewhere between a formal notice of intent and a negotiating tactic designed to force concessions under a tight deadline. However, with reported tariff rates being mooted at levels as high as 70%, the gesture is less of a gentle nudge and more of a firm shove. [3] This represents a quantum leap from the 10-25% tariffs that were the primary weapons in the last trade conflict, suggesting a strategy aimed at shocking counterparts into rapid compliance rather than engaging in protracted negotiations.
While the list of target nations remains speculative, a logical starting point for analysis is to examine the countries with which the United States maintains the largest trade deficits. These nations are the most probable recipients of such letters, as their trade surpluses have long been a focal point of protectionist rhetoric.
Top US Goods Trade Deficits (Year-to-Date, January-May 2024)
| Country | Trade Deficit (USD Billions) | Key Imports |
|---|---|---|
| China | $109.9 | Electronics, Machinery, Furniture |
| Mexico | $70.8 | Vehicles, Machinery, Agricultural Products |
| Vietnam | $42.9 | Apparel, Electronics, Furniture |
| Germany | $35.3 | Vehicles, Pharmaceuticals, Machinery |
| Japan | $29.3 | Vehicles, Machinery, Electronics |
| Canada | $28.2 | Mineral Fuels, Vehicles, Machinery |
Source: U.S. Census Bureau, data retrieved July 2024. [4]
Sectoral Vulnerabilities and Second-Order Effects
The direct impact of widespread tariffs falls squarely on industries with globalised production models. The automotive sector, a frequent target in past trade skirmishes, faces a double-edged sword: tariffs on imported parts would inflate production costs for domestic plants, while tariffs on finished vehicles would devastate foreign brands like BMW, Volkswagen, Toyota, and Hyundai operating in the US market. The Center for Automotive Research estimated that previous tariffs threatened hundreds of thousands of American jobs and could add thousands to the price of a new car. [5]
Beyond the obvious, the risk of retaliation introduces a dangerous reflexive loop. Should the EU or Japan be targeted, their response would likely be calibrated for maximum political impact in the US, targeting iconic exports such as Harley-Davidson motorcycles, Kentucky bourbon, or agricultural products like soybeans. This tit-for-tat escalation was a defining feature of the 2018-19 episode, which ultimately depressed global trade and investment.
The macroeconomic consequences are equally concerning. Tariffs are inherently inflationary, acting as a tax on consumers and businesses. Simultaneously, the uncertainty and friction they create act as a drag on economic growth. This combination presents a stagflationary risk that central banks are ill-equipped to combat. A central bank can tighten policy to fight the inflation component or loosen it to support growth, but it cannot do both at once.
Positioning for a New Trade Paradigm
For investors, the playbook from the last trade war offers a starting point. This involves assessing individual company exposure to international supply chains and export markets. Firms with predominantly domestic revenue streams and supply chains may become relative safe havens. The Russell 2000 index of smaller US companies, for instance, outperformed the S&P 500 during certain periods of peak trade tension in 2018, reflecting a rotation towards domestic insulation.
However, assuming a simple replay would be a mistake. The scale of the proposed tariffs is larger, the timeline is more compressed, and the global economic backdrop is more fragile. Hedging strategies, whether through options on specific indices like the SOX (semiconductor index) or via currency markets (long USD against a basket of exposed currencies), will likely become more prevalent.
As a concluding hypothesis, consider that the ultimate outcome may be less about achieving specific trade balances and more about catalysing a structural deglobalisation. If these policies are enacted, they could force a significant, and costly, reconfiguration of global supply chains over the medium term. The immediate market reaction will be driven by fear and uncertainty, but the long-term thematic may centre on the rise of regional trading blocs and a premium for companies that can demonstrate supply chain resilience, even at the expense of efficiency. The era of optimising for the lowest global cost may be decisively over, replaced by an era of optimising for geopolitical stability.
References
[1] Constantino, T. (2024, July 5). Trump says tariff letters to 12 countries, signed, going out Monday. CNBC. Retrieved from https://www.cnbc.com/2024/07/05/trump-says-tariff-letters-to-12-countries-signed-going-out-monday.html
[2] Reuters. (2024, July 6). ‘Tariff letters to 12 countries signed, going out July 7,’ says U.S. President Donald Trump. The Hindu. Retrieved from https://www.thehindu.com/news/international/tariff-letters-to-12-countries-signed-going-out-july-7-says-us-president-donald-trump/article69775929.ece
[3] Singh, K. (2024, July 7). Donald Trump Declares ‘The Letters Are Better’ While Approving Aggressive Tariff Moves On 12 Nations With Hikes Up To 70%. IndiaTimes. Retrieved from https://www.indiatimes.com/news/donald-trump-declares-the-letters-are-better-while-approving-aggressive-tariff-moves-on-12-nations-with-hikes-up-to-70-662946.html
[4] U.S. Census Bureau. (2024). Trade in Goods with World, Seasonally Adjusted. Retrieved from https://www.census.gov/foreign-trade/balance/index.html
[5] Center for Automotive Research. (2019). Consumer Impact of Section 232 Tariffs and Quotas on the U.S. Auto Industry. Retrieved from https://www.cargroup.org/publication/consumer-impact-of-potential-section-232-tariffs-and-quotas-on-the-u-s-auto-industry/
StockMKTNewz. (2024, July 5). [Post indicating Trump will have trade deals or letters with most nations done by July 9]. Retrieved from https://x.com/StockMKTNewz/status/1932771345688826193
