Investing.com -- A 10% tariff on all Chinese goods might not sound like good news, but for markets, it came as a relief. According to Wolfe Research, the scenario could have been much worse.
"Given the roller coaster of a week, it's wild that an incremental 10% tariff on all Chinese goods is a relief for markets," the investment firm said in a Tuesday report.
China’s response was measured. Within minutes of the US tariffs going into effect, Beijing announced a 15% tariff on US coal and liquified natural gas (LNG), as well as a 10% tariff on crude oil, farm equipment, and some autos. Importantly, these tariffs won't take effect until February 10, and their total impact is estimated to be less than $30 billion in goods.
Wolfe Research notes that markets were bracing for a broader trade war, including possible tariffs on Canada and Mexico. While there were moments when tariffs on those countries seemed imminent, "we continue to believe broad-based tariffs are unlikely until year-end, when tariff revenue is needed to extend the Tax Cuts and Jobs Act (TCJA),” strategists led by Stephanie Roth wrote.
Trump’s main focus appeared to be securing border enforcement, and with some progress on that front, he opted to delay tariffs on Canada and Mexico for 30 days.
From an economic perspective, the impact of these China tariffs alone is relatively modest. Wolfe estimates they will create a "14 basis points (bp) drag on growth and 12bp boost to inflation."
By contrast, the potential imposition of 25% tariffs on Mexico and non-energy Canadian imports, along with 10% tariffs on Canadian energy, would have been far more disruptive, with a combined estimated impact of a "1% hit to GDP, and 66bp boost to inflation."
Despite the latest developments, Wolfe is not adjusting its outlook for the US economy, maintaining expectations for "above-trend 2.2% GDP growth and modest 2.3% inflation this year." The firm believes tariffs will continue to serve as a negotiating tool through the first half of the year, with the real risk of escalation later in 2025 when additional revenue may be required.
For now, markets are taking comfort in the fact that the immediate worst-case scenario has been avoided.
“While there will still be noise over the next month about the potential imposition of tariffs on Canada and Mexico as the delayed deadline approaches, we don't anticipate these countries will bear the brunt of the trade war, especially Canada which has low numbers of border encounters and fentanyl seizures to begin with,” strategists said.
On the other hand, the tariffs on China are a step in Trump's broader strategy “to ratchet up tariffs on them, and may be sustained,” they added.