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With Donald Trump likely to return to the White House, market analysts are assessing the potential impact of a new round of trade wars.
According to Evercore ISI, a second Trump administration will likely bring volatility back to the markets.
“We believe Trump 2.0 will mean the return of trade-related market volatility and we would not be surprised to see markets begin to price in some of these risks soon,” the Evercore team stated.
Trump’s proposals include sweeping measures such as a blanket 10% tariff on all US imports and a 60% tariff on all imports from China. These measures are significantly more comprehensive than the tariffs he imposed during his first term and those that President Biden maintained with strategic adjustments. The extreme starting points of these proposals suggest that Trump is serious about using tariffs more broadly.
Even if the proposals were a negotiating tactic, tariffs would still increase significantly under Trump 2.0. Evercore highlights a subtle but noteworthy shift in Trump’s approach to the trade deficit, implying a serious intention to use tariffs on a more comprehensive basis, a modification embodied in former US Trade Representative Robert Lighthizer’s comments about the need for balanced trade on… Superficial fair trade.
Evercore warned that if implemented, even a scaled-down version of these proposals could push US tariffs to levels not seen since the 1940s.
As a result, the potential for increased tariffs could lead to significant market uncertainty, similar to the volatility observed during the trade disputes of 2018-2019. Evercore ISI also noted that uncertainty in trade policy can lead to significant market volatility as investors struggle to interpret policy statements and predict foreign retaliation.
During Trump’s first term, the dollar saw a cumulative decline of 11% on days of major trade policy announcements, underscoring the markets’ sensitivity to such events. The second term could see similar patterns, with more aggressive trade measures imposed against China and other countries.
Evercore’s analysis believes that although markets partially or fully recovered within five trading days after several announcements, the initial uncertainty contributed significantly to the observed volatility.
Moreover, the process of implementing these proposals “will not be clear or predictable,” Evercore notes, adding to market uncertainty.
“As we saw in 2018-2019, trade policy uncertainty can lead to market volatility, as investors may have difficulty interpreting Trump’s statements and their impact and predicting foreign retaliation. The investment bank added: “While this article focuses on tariffs, there will be “A host of other trade issues are up for discussion.”
While markets are currently pricing in little risk from a new round of trade wars, the possibility of Trump’s return and his aggressive trade proposals could lead to significant market volatility.
As such, investors should be prepared for potential turmoil and monitor the evolving political landscape closely.
“Given Trump 2.0’s potential far-reaching plans on trade, we believe markets can begin to price in trade-related risks across a range of areas,” Evercore wrote.
