After months of hot rhetoric and multiple delays, it appears that U.S. President Donald Trump will begin a new era of U.S. tariffs on April 2nd. He had previously imposed significant tariffs on China and on all suppliers of steel and aluminum during his first time. He renewed steel and aluminum tariffs two weeks ago. But April 2nd is the new deadline expected to trigger reciprocal tariffs on worldwide imports into the U.S.
Key considerations? These include the relative tariff level and excluded items. A 25% tariff is much more punitive than a 10% tariff, but according to the great negotiator, rates are open to negotiation. Trump often speaks of Canada’s 239% tariff on dairy imports from America. Will these tariffs go to the product levels? Broadly speaking, that is doubtful. It would be impossible to analyze and quantify product-level tariffs on 100+ nations in a month. But some, like Canadian dairy, could face product specific tariffs. And what about strategic imports like military equipment, computer chips, and energy? What about products that are not produced (or barely produced) in the U.S. like coffee, bananas, and orange juice? There will likely be exemptions for some products.
Who pays the tariff? Regardless of the technicality that importers are required to remit tariffs, the ultimate cost can be borne by the exporting company, importing company, middlemen, and/or consumers. In a free market economy tariffs are always allocated by market forces (leverage). Consider fed cattle from Alberta that are slaughtered in America. Will U.S. packers immediately pay a 25% premium (if that were the tariff) over and above what they pay for U.S. cattle? No. But plants that depend on those Canadian cattle may have to offer something to keep those cattle coming. Alberta feeders may have slowed down feeding/gains in anticipation of needing to hold cattle longer as leverage. And U.S. packers may have backlogged a few more cattle to their advantage. The tariff will be negotiated in every transaction. Some beef exporters to the U.S. have included “force majeure” statements requiring imports to pay any additional tariffs assessed. But that is open to debate from both buyer and seller.
In the case of U.S. steel and aluminum tariffs which began in mid-2018 and lasted through mid 2019 for most suppliers, U.S. steel prices actually declined during that period. Mexican retaliation on U.S. pork during that period saw initial price declines for U.S. hams, but then they quickly rebounded well ahead of the tariffs being lifted. Regarding this often over-simplified question, the answer is, “It’s complicated”. There are many shock absorbers in the system to help bear the brunt of tariffs and leverage determines the ultimate cost.
Another factor is the U.S. dollar rates. We have seen periods over the last year where the dollar surged 10% against some key currencies (it has since subsided). But a strengthening dollar offsets the tariff impact on overseas suppliers.
What about retaliation? Retaliation is likely. China has already retaliated with a 10% tariff on U.S. pork, beef and soybeans and a 15% tariff on U.S. poultry, wheat and corn. U.S. pork also pays a 25% retaliation tariff left over from Trump’s first term making the total Chinese tariff on U.S. pork 47% currently.
Other retaliation by Canada and Mexico are likely. Japan and Korea are very export-dependent on the U.S. and may take a softer stance with retaliation. Trump has reinforced that any retaliation will be met with higher reciprocal tariffs; repeat until ….?
Bottom Line: Panic Slowly
Our advice remains “Panic slowly”. This statement infers a strong cause for concern, but also a timed, strategic view and response. There will be ongoing negotiations. Trump remains the world’s dealmaker. Plan accordingly knowing that tariffs are not bans. Product will still flow. Costs will be absorbed and, based on the tariff levels and dollar levels, may have limited impact for most products.