Trump tariffs 2.0 | Hotter Commodities

United States president-elect Donald Trump has called “tariffs” his “favorite word” and made them a key tenet of his economic agenda during the 2024 election campaign.

He employed the use of import tariffs and other duties throughout his first term as president, including on aluminium and steel. And for his second term, Trump is particularly focused on upping the ante on China and has said he plans to introduce new duties “from day one” of taking office on January 20.

To that end, market participants expect the president-elect to come out of the gate all guns blazing – largely because Trump has already outlined his plans to impose a 25% tax on all products entering the United States from Canada and Mexico, with an additional 10% tariff going on to goods from China, taking those tariffs up to 60%.

Tariffs will stay in place, he wrote on his own social media platform Truth Social, “until the inflow of drugs and illegal immigration into the United States comes to an end.”

He has also talked about a 10% universal tariff on all goods imported into the US, which he said would raise billions to reduce the deficit and allow the government to pay for social and industrial programs.

Whether all these tariffs materialize is another matter, however.

From his statements so far, Trump plans to use some of the proposed tariffs as a bargaining tool to secure leverage on specific measures. That means if Trump secures the concessions he wants, the tariffs might be avoided.

What is not yet clear is whether he will embrace slightly softer “carrot” tactics or double-down on a less conciliatory “stick” approach.

If the incoming US Treasury secretary, Scott Bessent, has anything to do with it, the approach will be more moderate – Bessent has called for tariffs to be “gradual,” and has described the 60% China tariff threat as a “maximalist negotiating position.”

Economists warn that tariffs are also inflationary, would lead to the appreciation of the US dollar, thereby raising the prospect of higher interest rates.

Nonetheless, the consensus is that, whatever else happens, the future Trump administration will implement a 60% tariff against China. Pundits are also broadly betting that the floated 10% universal tariff will come into effect as part of a plan to slash US debt and generate revenues to be used elsewhere.

In theory, a 10% tariff on the $3.1 trillion of goods imported into the United States in 2023 would raise $310 billion. In practise, a universal tariff is likely to have exemptions, such as services and oil & gas, and would reduce import volumes – meaning the overall revenue generated while still impressive, will almost certainly be lower.

Looking to history, the Nixon shock in 1971 saw a 10% surcharge applied to half of all goods, while in 1930, the Smoot Hawley Tariff Act applied to just over half of all goods. Observers have said that a universal tariff is likely to be of a similar order of magnitude, although it’s important to note that both political decisions were key factors leading to subsequent severe economic recessions.

Commodities in focus

Until Trump moves into the White House and action is taken, the “not knowing” is wreaking havoc in the commodity markets, with market participants working to lock-in terms for supply contracts despite have no certainty about the economics behind their deals.

Of course, tariffs aren’t new to the commodities markets and outgoing president Joe Biden kept the Trump-era tariffs in place for China and imposed some more of his own – including a 100% tax on imports of Chinese electric vehicles (EVs) and a 25% tax on lithium-ion batteries, along with steel and aluminium products.

The US steel market has broadly cheered the prospect of additional tariffs in 2025, having benefited heavily from protectionist measures in Trump’s first term in office.

Steel market participants in Mexico and Canada, however, appear less impressed, and leaders of both countries have already had conversations with Trump in an apparent effort to head off tariffs.

Trump has said that he plans to notify Mexico and Canada of his intention to use the six-year renegotiating provision of the United States-Mexico-Canada Agreement (USMCA) to strike better deals – notably with regard to the automotive sector.

For aluminium market participants, it’s déjà vu – all over again.

The US Aluminum Association has already emphasized its view that tariff-free access to the imported Canadian aluminium it so heavily relies on, must be maintained.

It’s an often-overlooked fact that three out of every four cars sold in America contains aluminium from Canada, while one out of every three car and truck wheels manufactured in the US contains aluminium produced in Canada by Rio Tinto. Parts cross the border sometimes more than half-a-dozen times before finishing in a vehicle that ends up in a sales lot in either the US or Canada.

This integrated supply chain has been in existence for decades and provides a competitive advantage to the two countries.

After all, there’s no such thing as an American car – there are US companies, brands and operations, but supply chains are integrated and global.

Tit for tat

As was the case during Trump’s first term, tariffs are likely to lead to retaliatory actions.

In response to tariffs on steel and aluminium during Trump’s first administration, countermeasures were imposed in response. Canada imposed tariffs on aluminium and certain types of American steel as well as yoghurt, whiskey and roasted coffee, while the European Union slapped taxes on products ranging from bourbon to Harley-Davidson motorcycles.

Agricultural commodities were very much used as fodder in a tariff war during the first Trump administration, and there’s concern that this situation will be revived.

China hit back against the tariffs with its own taxes on imports of soybeans and pork, a move calculated to weaken Trump’s support among farmers. Since then, China has been diversifying its sources of agricultural commodities, such as corn, soybeans and sorghum – products that it  typically buys from the US.

This time around, the prospect of tariffs on Mexican tequila and beer have been mooted, while Canada could revive its previous tariffs on products including whisky, ketchup, liquorice, and toilet paper, market observers told Fastmarkets.

There is also a risk that the re-routing of goods – when companies export products to the US relabelled via a third country with a lower import tariff – will grow if widespread tariffs are imposed.

This has been common practice in recent years, leading the Biden administration to impose measures to ensure that Mexican aluminium imports had not been smelted or cast in China, Russia, Belarus or Iran and that imported steel from Mexico had been melted or poured in North America.

China still has some powerful weapons in its arsenal, not least its own restrictions on products imported into the US.

China is already crimping supplies to the US of critical minerals on which the latter relies for defence and semi-conductors, such as gallium, germanium, antimony and graphite.

The Asian country could easily expand its restrictions to other products that the US relies on, such as rare earths. Tariffs are a two-way conversation, and China may well have some of its own “trump cards” to play.

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