With the possibility of Donald Trump returning to the White House, market analysts are assessing the potential impact of a new round of trade wars.
A second Trump administration is likely to bring volatility back to markets, according to Evercore ISI.
“We believe Trump 2.0 will mean a return to trade-related market volatility, and we would not be surprised if markets begin to price in some of these risks soon,” the Evercore team said.
Trump’s proposals include sweeping measures such as a blanket tariff of 10% on all imports from the United States and a tariff of 60% on all imports from China. These measures are markedly more extensive than the tariffs imposed during his first term and the tariffs retained by President Biden with strategic adjustments. The extreme starting points of these proposals suggest Trump is serious about using tariffs more broadly.
Even if these proposals serve as a negotiating tactic, tariffs will still rise significantly under Trump 2.0. Evercore highlights a subtle but noteworthy shift in Trump’s approach to the trade deficit, implying a serious commitment to using tariffs on a broader basis, exemplified by former US Trade Representative Robert Lighthizer’s comments on the need for balanced trade rather than superficial fair trade.
If implemented, even a scaled-down version of these proposals could raise U.S. tariffs to levels not seen since the 1940s, Evercore warns.
As a result, this potential for tariff increases could lead to significant market uncertainty similar to the volatility observed during the 2018-2019 trade disputes. Evercore ISI also noted that uncertainty in trade policy could trigger significant market volatility as investors find it difficult to interpret policy statements and predict foreign responses.
During Trump’s first term, the cumulative decline was 11% on days of major trade policy announcements, highlighting the sensitivity of markets to such events. The second term could see similar trends, with more aggressive trade measures introduced against China and other countries.
Evercore’s analysis suggests that while markets partially or fully recovered within five trading days following the slew of announcements, initial uncertainty contributed significantly to observed volatility.
Moreover, the implementation process for these proposals “will not be straightforward or predictable,” Evercore said, adding to the uncertainty in the market.
“As we saw in 2018-2019, uncertainty in trade policy can trigger market volatility as investors may have difficulty interpreting Trump’s statements and their impact, as well as predicting foreign responses. While this article focuses on tariffs, many other trade issues will be discussed,” the investment bank added.
While markets are currently pricing in little risk of another round of trade wars, the prospect of Trump’s return and his aggressive trade proposals could lead to significant market volatility.
Thus, investors should be prepared for potential disruptions and closely monitor the evolving political landscape.
“Given Trump 2.0’s potentially far-reaching plans for trade, we believe markets may begin to price in trade-related risks in a number of areas,” Evercore wrote.