There's a "fragility" - and possibly a crack allowing for a negotiated resolution - in the executive order by US President Donald Trump this weekend imposing a 25% tariff on most goods entering the US from Canada and Mexico, analysts at Macquarie said in a research note Monday.
Analysts Thierry Wizman and Gareth Berry said Trump's rationale for tariffs is a "flimsy" link between national security concerns in the US and actions in Canada and Mexico. Instead, one likely factor is the trade deficit between the countries, which is absent in the order, and likely the motivating factor for Trump, along with his desire to return production and capital to the US, according to the analysts.
Regardless of his reasons, the more immediate issue will be the potential impact of tariffs and the retaliatory responses within the North American economies, according to Macquarie. For exporters into the US, profit margins are expected to shrink, while they find new markets and customers, establish new logistics relationships and pay more for fuel and other costs.
Higher prices are unlikely to be offset by any increase in national income, the analysts said, noting how GDP growth slowed significantly in the US and Canada between mid-2017 through late 2018 while Trump imposed or was threatening tariffs during his first administration.
While tariffs will likely weigh on equity markets and keep the Federal Reserve from trimming interest rates, Macquarie said one immediate beneficiary could be the US dollar, which has long been a popular destination for investors during periods of uncertainty.
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