Transcript

 Edmund Shing

Hello and welcome to a new podcast from BNP Paribas Wealth Management. I'm Edmund Shing, Chief Investment Officer. Today with me I Guy Ertz, Deputy Chief Investment Officer from Luxembourg. Today we are going to talk about the Tariff Man, Donald Trump. Trump 2.0, who has launched tariffs against Mexico, China and of course, Canada, potentially with other countries to follow. If we're going to talk about this deal, let's kick off with the first question: Which countries are being targeted by Trump? Why? And can you give us a little bit more detail on how are they being targeted?

Guy Ertz

Over the weekend, we had announcements on tariffs regarding China, Canada and Mexico. The tariffs were somewhat higher than we initially expected. So, we have 10% tariffs on China and 25% tariffs on Canada and Mexico, some minor exceptions. But this is the starting point. Now, interestingly, they were announced to be started today. But by then, yesterday, there were already some contacts between Trump and the different leaders. And actually for Canada and Mexico, we already have a 30-day delay before any of those tariffs are implemented. So there is already a period of negotiation that is starting.

Edmund Shing

Okay. So, you know, that's obviously thanks to the Mexican president and the Canadian prime minister, both agreeing to some certain measures and I guess the 30 days now to see whether those measures are actually carried out in force. For instance, with the Mexican president, Claudia Sheinbaum promising to place 10,000 Mexican soldiers along the border to prevent the flow of illegal fentanyl and also illegal immigrants from Mexico into the US.

That's where we are today with the three countries Canada, Mexico and China. But those aren't the only three that Donald Trump has mentioned when talking about tariffs. Who else could be next in line for another round of tariffs?

Guy Ertz

Well, the obvious candidate is of course, Europe, in particular the eurozone and more precisely, countries where there is a very big trade surplus. So what we have as a situation today is, of course, if there are tariffs that are set for Mexico, that is already affecting at least some European companies negatively because, typically German carmakers have already over the past few years shifted production of cars and car parts to Mexico. So that is already sort of a direct impact from that angle. And then, of course, there will be negotiations probably also with Europe. It’s likely that there will be first a relatively high tariff that will be set and then negotiations will start.  And obviously negotiations could be about Europe buying more gas and oil and obviously also defence goods. So there is a possible agreement from that side.

Edmund Shing

Yes Europe could be next in line. But there are some possible offsets. We could promise to buy more from the US. Now when we talk about tariffs, so clearly an import tax, so if implemented in theory they should generate revenues. Now is that the ultimate target. Is Donald Trump just trying to raise tax revenues given the large budget deficit that the US has today? Or does he have other ultimate objectives in mind?

Guy Ertz

There are two angles and they refer to probably a different time frame. The first angle is to use the tariffs as a negotiation tool. And that's of course, fixing very high levels and then negotiating and eventually not having very high tariffs remaining over time. The second possibility is, of course, to use tariffs and fixed tariffs at a high level for a longer period of time. That would have the advantage of generating revenues for the government so they could be used to reduce the deficit or eventually finance other types of measures. And obviously and that's the more structural part, higher tariffs could then obviously over time redirect supply chains and bring them back to the US and create jobs in the US. So these are the two angles I think here and they refer to a different time frame.

Edmund Shing

So if we assume that the current level of tariffs that has been proposed by Donald Trump, let's say they're put into force and they're maintained over the longer term, what potential impact do you estimate that they could be, firstly on US economic growth, secondly on US employment and thirdly on US inflation?

Guy Ertz

We know that when tariffs are fixed for a longer period of time, there is generally obviously retaliation. So that means that the other side, so the other country is also going to use tariffs. And that is obviously then making the whole situation much worse for both. We know that over time, that generally has a negative impact on net growth for both, and obviously it also tends to push inflation higher because tariffs are a form of tax and obviously play a direct role in the inflation or via imported inflation.

But they can also destabilise inflation expectations; because these expectations play a very key role for the central bank. And here we come. There is another angle to keep in mind: the US is still close to full employment. So, if there are tariffs here to stay, we have definitely an issue, about higher inflation over time. And that could destabilise inflation expectation and then also force the Fed either to stop rate cuts or even to consider rate hikes. So that is obviously something that would be negative over time we think.

Edmund Shing

Okay. So bottom line, do you think honestly that Donald Trump will maintain these tariffs? Or do you think he'll either cut them or delay them on a more permanent basis once he gets whatever concessions he's looking for from these targeted countries?

Guy Ertz

As I mentioned, keeping tariffs at such high levels has definitely a negative impact on growth and inflation and potentially on rates via the central bank. So as we know that we have the midterm elections next year in 2026, and we know that American voters are very sensitive to inflation; it seems unlikely that the President has not in mind that this could play against him and against the Republicans in the sense that they could lose their majority, the thin majority that they have in the House of Representatives. So that is, we think, the key argument why the tariffs are unlikely to remain at such high levels, they are likely to be used as a negotiation. And for most countries, there is a relatively straightforward argument here to negotiate and possibilities to find a deal. So our base case is clearly that we have started now the round of negotiations, that these should lead to deals, and those deals should lead then at least to lower tariffs, or in some cases, maybe the tariffs been removed. So that's really how we see the situation at this stage.

Edmund Shing

Yes, so I think that's a fair summary of our views. And I think what I would add if you look at the reaction from financial markets, that in the case of the US dollar, yes, it has strengthened, but the strengthening of the US dollar against the Mexican peso, Canadian dollar, Renminbi and other currencies actually has been taking place since late last year before even Donald Trump was re-elected. And it seems, if anything, to be stalling now and not continuing to strengthen but stabilising.

Secondly, if you look at the impact on longer term interest rates, bond yields, there's actually been a very muted reaction. Bond yields haven't really moved up. If you look at the benchmark ten-year Treasury yield, it's still around 4.5%. Even the two-year Treasury yield hasn't moved by much. So again I would say up to now in the short term, the impact of this tariff announcement at the end of January has had been very muted in terms of the financial market reaction.  People seem to be quite sanguine about that and as you say, we are not necessarily expecting the full inflation and growth and employment impacts to come through as they expect these tariffs to maybe to be diminished or even, as you say, to be just lifted over time. Excellent.

Well, we of course will have to watch the headlines and the newsflow because of course, day by day this story can change. But I think that's a very good summary of the state of affairs as we know it today. Thank you very much Guy for joining me today.

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