Global economy on edge ahead of Trump's trade deal deadline

Globe and Mail

6 hours ago

After U.S. President Donald Trump imposed hefty tariffs on dozens of countries in April, then announced a three-month pause, one of his top advisers made a bold prediction.
'We're going to run 90 deals in 90 days,' Peter Navarro, the president's trade adviser, told Fox Business Network. Trade partners would trip over one another to offer concessions to the U.S. in order to avoid the threatened 'reciprocal' tariffs.
With the July 9 deadline only days away, the Trump administration has come up short. It has signed only three deals – two barebone trade pacts with Britain and Vietnam and a partial and temporary tariff truce with China.
On Thursday, a frustrated Mr. Trump said he would start sending letters to countries that had failed to reach an agreement with the White House, dictating tariffs as high as 70 per cent that would come into force in August.
The situation is combustible. If Mr. Trump proceeds with the unilateral imposition of punishing tariffs, major trading partners that have held off retaliation will likely hit back with their own counter-tariffs. That could escalate quickly, convulsing supply chains and disrupting the calm that has prevailed in financial markets since April.
Mr. Trump has threatened to send tariff letters before without following through. And more deals could emerge before the July 9 deadline. Trade officials from the European Union, Japan, South Korea and other countries, including Canada, have all been in Washington looking for a breakthrough.
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Still, the fact that Mr. Trump – who fancies himself the ultimate deal-maker – has had such trouble closing, highlights the limits of America's ability to force its protectionist vision on the rest of the world.
Access to the world's largest consumer market is potent leverage in any trade discussion. But other countries have diverse interests and complex domestic politics that make large trade concessions difficult. And they have an incentive to rag the puck, hoping Mr. Trump backs down in the face of renewed market turmoil, domestic opposition or court challenges.
'Countries don't view these talks entirely as a math equation,' said Brian Clow, who was deputy chief of staff to former prime minister Justin Trudeau and who helped oversee Canada-U.S. relations. 'It's also about pride and sovereignty, and so countries are only willing to bend so much to this president.'
Mr. Trump's wholesale attempt to re-engineer the global trading system kicked into high gear on April 2, which he dubbed 'Liberation Day.'
Using executive powers outlined in the International Emergency Economic Powers Act, Mr. Trump imposed a baseline tariff of 10 per cent on all trading partners – excluding Canada, Mexico and China, which had already been hit with IEEPA tariffs, ostensibly to punish them for shortcomings on border security. He also unveiled 'reciprocal' tariffs on some 50 trading partners, ranging from 10 per cent on the United Kingdom to 49 per cent on Cambodia.
(These tariffs are separate from the sectoral tariffs Mr. Trump has placed on steel, aluminum and automobiles using Sec. 232 of the Trade Expansion Act).
The verdict on 'Liberation Day' was swift and damning. Stock markets plunged and the U.S. dollar tumbled. There was a sharp sell-off in U.S. Treasuries alongside worrying signs of dysfunction in the world's most important bond market.
After a week, Mr. Trump relented and announced the three-month pause, citing the 'yippy' bond market as a reason he reversed course.
That set in motion the three-month sprint to get deals done. Britain reached an agreement first, which lowered levies on British car exports under a 100,000-vehicle quota and established duty-free quotas for beef, but left a 10 per cent baseline tariff in place.
That was followed by an agreement with China that walked back the triple-digit tariffs both countries had placed one another in a mutually destructive show of brinksmanship. The truce is only six-months long and leaves the U.S. effective tariff rate on Chinese goods above 30 per cent.
Then this week, the White House announced an agreement with Vietnam, that puts a 20 per cent tariff on Vietnamese goods (which is lower than the 40 per cent Mr. Trump had threatened), as well as a 40 per cent tariff on products that are deemed to have originated in China and been shipped to the U.S. via Vietnam.
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Other deals are in the works. Negotiators from Japan, South Korea and the European Union have been meeting with Mr. Trump's trade team, led by Commerce Secretary Howard Lutnick and U.S. Trade Representative Jamieson Greer. But leaders in Tokyo, Seoul and Brussels have all indicated in recent days that the negotiating teams remain far apart and deals by July 9 are unlikely.
'The bottom line is that the Trump administration wants a fundamentally unbalanced deal,' said Jacob Funk Kirkegaard, a senior fellow at the Brussels-based think tank Bruegel.
'They want something like what they got with the U.K., what they appear to have gotten with Vietnam. But that doesn't work with, an economy that is roughly the size of the U.S. itself,' he said, referring to the EU.
Ottawa is also trying to secure a deal with Washington but is working toward a self-imposed July 21 deadline. Canada wasn't hit with 'reciprocal' tariffs, but is facing sectoral tariffs on steel, aluminum and automobiles as well as levies on goods that don't comply with continental free trade agreement's rules of origin.
While many countries appear to be earnestly engaging with the U.S., there are reasons to slow-walk negotiations. In May, the United States Court of International Trade ruled that Mr. Trump's use of IEEPA to impose tariffs was illegal, calling into question the basis of Mr. Trump's 'reciprocal' tariff plan. That ruling has been stayed until an appeal can be heard by a higher court, but it may be giving trade negotiators from other countries pause.
There are also already more U.S. sectoral tariffs in the pipeline, with investigations currently under way into pharmaceuticals, lumber, semiconductors and copper that could result in Sec. 232 tariffs like those on steel, aluminum and automobiles. That means foreign negotiators don't have a clear picture of what other tariffs they may ultimately face when they're offering concessions.
'This type of exercise or negotiation is facilitated when both sides are putting chips on the table,' said Jeffrey Schott, a senior fellow at the Peterson Institute for International Economics and a former U.S. trade negotiator. 'But in many respects the United States is just making demands and saying we will limit the protection we impose against you if meet our demands. That's a tough negotiating position.'
So far, financial markets have taken this trade uncertainty in stride. Equity markets have rebounded from the post-'Liberation Day' slump and hit record highs in recent days. Volatility remains low in bond and currency markets.
Robin Brooks, senior fellow at the Brookings Institution and a former chief FX strategist at Goldman Sachs, said that markets are responding positively to the trade détente between the U.S. and China, as well as the better-than-expected U.S. economic data that suggests earlier recession calls were overly pessimistic.
As long as China and the U.S. don't resume their hot trade war, markets may shrug off a breakdown in trade discussions between the U.S. and the EU or Japan, Mr. Brooks said. But they likely won't be so sanguine if the failure to hit the July 9 deadline causes another round of erratic flip-flops from Mr. Trump.
'The dollar didn't fall because of tariffs. It fell because of this back-and-forth which in markets created a perception of chaos,' Mr. Brooks said of the market meltdown in April. 'If you're trying to put a finger on what could cause markets to fall out of bed, then it's more stuff like that, more back and forth.'