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Markets in countries at risk of US tariffs may have been pricing in risks for some time — equities in China, Mexico and Canada have all underperformed MSCI World since before the election. However, the performance of these countries’ equities last week suggests that investors are starting to become a little less worried. US president Donald Trump last week said he might impose a 10% tariff on China, starting in February — much less than the 60% Mr Trump threatened during his election campaign. At the same time the US president also said he was minded to impose a 25% tariff on Mexican and Canadian goods. But during the election campaign Mr Trump threatened to impose tariffs on Mexico and Canada on his first day in office, and the fact that this has now been pushed back to 1 February suggests that there may be room for negotiation. Since 80% of Mexico’s exports go to the US and these account for more than a quarter of the country’s GDP, any trade restrictions would have large impacts on the country’s economy. It increasingly seems that the threat of tariffs is being used as a negotiating tactic to achieve goals consistent with ‘America first’ – over the weekend, Mr Trump threatened to impose tariffs on Colombia if the country didn’t accept deported migrants aboard US military flights. Colombia agreed. While tariffs may have negative macroeconomic implications in the US, such as on inflation, the resulting market volatility from the negotiation process may also present opportunities for investors.
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The views expressed in this article are the views of the author, not necessarily those of LSEG.
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