Reciprocal Tariffs Impact:
February 19, 2025
U.S. President Trump introduced the "Fair and Reciprocal Plan" to address practices deemed unfair by his administration. This plan aims to equalize tariff rates and increase tariffs in response to non-tariff barriers, like value added taxes (VATs), government subsidies, regulations and legal actions against U.S. companies.
Equalizing tariff rates and focusing on non-tariff barriers could cause potential economic impacts. As we approach the April 1 deadline, here are the markets most at risk:
- European Union (EU): The U.S. and the EU have similar average tariff rates on each other’s imports, but disparities arise at the product level. The EU imposes a 10% tariff on U.S. autos, whereas the U.S. applies a 2.5% tariff on European autos. In addition, the administration argues that Europe’s value-added tax (VAT), which averages 20% vs. the average U.S. sales tax of 6.6%, disadvantages the U.S. If the U.S. retaliates against VATs, reciprocal tariffs could exceed 20%.
- Emerging Markets: Tariffs are common in emerging markets to protect nascent industries. India and Brazil have average tariff rates of 11.5% and 7.4%, respectively, on all imports. India, which had a USD 43 billion trade surplus with the U.S. in 2023, has begun reducing tariffs on certain products to ease tensions. Brazil, which maintains a slight trade deficit with the U.S., may face less targeting, though high tariffs on products like U.S. autos and ethanol are still pain points.
Scoping out government employment
February 10, 2025
The current administration aims to reduce the federal workforce as part of its fiscal strategy, proposing measures like severance packages, hiring freezes, and potential agency eliminations. However, data suggests there may be limited scope for significant cuts. There are three million federal jobs (excluding active duty military personnel), representing just 1.9% of all jobs. In contrast, state and local governments account for 13% of total payroll jobs, but the federal government lacks authority over those positions.
Federal employees on an average earn USD 106.5k annually, so a 10% reduction in the federal workforce would save only USD 32 billion per year or 0.5% of the 2025 federal budget.
Lessons from 2018: Tariff and Tax impacts on Equities
February 07, 2025
There is uncertainty regarding the development of tariffs and tax reform, but 2018 can offer insights into how these policies could impact profits, corporate activity and market performance.
- Earnings and Margins: The 2017 Tax Cuts and Jobs Act added roughly USD 13 to earnings per share when implemented in 2018. Profits grew an impressive 21% that year, and margins contributed to about half of that profit growth.
- Revenues: Revenues increased 7.2% in 2018 as consumers enjoyed an income tax cut. However, consumer spending decelerated throughout 2018 and the cumulative effects of tit-for-tat trade tensions began to weigh on revenue in 2019.
- Buybacks and M&A: Elevated margins from tax cuts invited a flurry of corporate activity. Announced mergers and acquisitions (M&A) volumes leapt in 2017 to record levels, and while momentum slowed in 2018, overall volumes and deal count remained elevated. The value of announced S&P 500 buybacks jumped 68% in 2018.
- Capex: Capex intentions peaked in 1Q18 and gradually declined, echoing a rise in economic policy uncertainty likely arising from tariffs. We have already seen this dynamic emerge today—last month, capex intentions had the biggest decline in 30 years according to the NFIB.
- Market performance: Profits helped the S&P 500 notch 19 new all-time highs in 2018 and shrug off volatility generated by trade tensions, but a hawkish Federal Reserve soured markets, leaving the S&P down 6.2%. In the end, earnings contributed 16% points to the S&P 500 return, but multiples subtracted 22% points.
Lessons from 2018: Tariff and Inflation
February 05, 2025
Overall inflation remained contained in 2018, though sectors that were exposed to tariffs did see upward pressure on prices. However, the limited scope of the 2018 tariffs confined price increases to just a few sectors, and in the generally benign environment of the time, these price rises were offset by price declines elsewhere.
China’s potential responses to tariffs
February 05, 2025
China’s response to U.S. tariffs could resemble its 2018-2019 playbook:
- Retaliatory tariffs: Large-cap U.S. tech firms derive approximately 14% of their revenues and 16% of their inputs from China.
- Currency depreciation and export diversification: From peak to trough within the trade tensions period, the CNY depreciated by 16% vs. the USD, helping offset the impact of tariffs and facilitating trade diversification toward other markets.
- Export restrictions and U.S. company crackdowns: China could expand mineral export controls and challenge U.S. businesses operating in China.
- Fiscal stimulus: Tariffs could hurt China’s GDP growth due to lower investment, consumption and reduced business confidence, requiring increased fiscal stimulus.
Tariffs on Mexico, Canada and China
February 03, 2025
Tariffs on Mexico, Canada and China could have a notable impact on each economy:
- Announced tariffs imply an average import tax of 19% on those goods. Under the crude assumption that a 19% increase in prices results in a 19% decline in purchases, the tariffs proposed could raise USD 206 billion.
- Total U.S. consumer spending is USD 19.8 trillion. If all of the price increase were passed on to consumers, it could increase CPI by just over 1%.
- The administration may view tariffs as a strategic tool to address immigration, drug trafficking, trade deficits/disputes and geopolitical influence.
- Exports to the U.S. make up 32% of Mexico’s GDP and 21% of Canada’s.
- Mexico and Canada account for 52% of U.S. auto part imports, while Canada alone makes up 60% of U.S. crude oil imports.
Inflation expectations by political affiliation
The latest University of Michigan survey of inflation expectations revealed a sharp increase. However, political biases are clear given the divergence by political affiliation: Republicans expect inflation to nearly stall at 0.1%, while Democrats forecast a surge to 4.2%.
Boosting energy production
U.S. President Trump signed a slew of executive orders and made several declarations to boost U.S. energy production and deregulate oil drilling. However, the U.S. is already the world’s largest crude oil producer and LNG exporter. The difference between U.S. primary energy production and consumption has reached the highest levels in recorded history.
In addition, energy companies may not want to significantly ramp up supply as it would decrease oil and gas prices and impact profitability. Oil exploration and production firms need oil prices at USD 64 on average to profitably drill a new well, leaving little room for current prices to decline.
Executive Orders in Week 1
January 27, 2025
After the inauguration, the U.S. President Trump:
- Revoked 67 executive orders signed by President Biden, including regulations imposed on the development of artificial intelligence, public health and environmental issues
- Ended federal diversity, equity and inclusion (DEI) programs
- Withdrew from the Paris climate accord and World Health Organization
- Declared a national energy emergency, reopening large swaths of federal land and federal waters to oil and gas drilling
- Put a 60-day freeze on new federal regulations
On balance, less federal regulation going forward could boost real gross domestic product (GDP) growth, although with hard-to-assess impacts on the risk of disaster, should something go wrong.
Podcast: Volatile markets after Lunar New Year - Tariffs, AI and the Fed
February 04, 2025
In this episode of the On Investors' Minds - APAC Edition podcast, Tai Hui welcomes everyone back from the Lunar New Year break and takes a closer look at the recent market volatility that has stemmed from recent tariff tensions, new AI engines, and the U.S. Fed taking a pause.