(Zero Hedge)—Just two weeks into his second term, President Trump announced the first round of tariffs on Saturday, marking the resumption of his trade war. The new measures impose a 25% tariff on imported goods from Mexico and Canada—though energy imports from Canada will face a reduced rate of 10%—and a 10% tariff on imports from China. The weekend announcement surprised many world leaders and Wall Street but apparently captured Beijing’s attention.
The Wall Street Journal reports that China is preparing for trade talks with the Trump administration, aiming to restore a trade agreement with the US and reaffirm its pledge not to devalue the yuan for a competitive advantage in global trade. Based on unnamed sources, the report has not yet been officially confirmed.
Here’s more from the report:
As part of its effort to prepare for negotiations, according to the people, China’s initial proposal will center on restoring a trade agreement Beijing signed in early 2020 with the first Trump administration but didn’t implement.
The so-called Phase One deal required China to increase purchases of American goods and services by $200 billion over a two-year period. While Trump himself has described Phase One as the “greatest deal” ever made, many trade experts and business executives called it unrealistic to begin with.
Having failed to deliver on its pledge under the deal to increase US purchases, Beijing now is preparing to talk to the Trump administration about areas where China can buy more from the US, the people said.
Other parts of China’s plan, the people said, include an offer to make more investments in the US—in sectors such as batteries for electric cars, a renewed pledge by Beijing not to devalue the yuan to gain competitive advantage, and a commitment to reduce exports of fentanyl precursors.
Beijing views the 10% tariff as Trump’s way of bringing all parties to the negotiating table. Trump has threatened to impose maximum-pressure tariffs on China, potentially as high as 60%.
The initial reaction from Beijing has been muted, with the Commerce Ministry expressing strong “dissatisfaction” and vowing “corresponding countermeasures.”
Wang, UBS chief China economist, told clients earlier that Beijing would be willing to negotiate because of the negative impact the trade war could have on its economy. The 10% tariff, she said, would reduce the country’s GDP by .3 to .4 percentage points.
Goldman’s Dan Dooling (EMEA Head of FX HF Sales) provided clients with a great summary of the trade situation unfolding from Saturday:
- Weekend Trump tariff announcements a surprise vs Friday’s close
- US effective tariff rate rises +7% from from Mexico & Canada proposals with a further 1% from China proposals
- 2.5% GDP hit in Canada, 3.5% in Mexico under full 25% tariff
- The 25% Canada and Mexico tariffs imply a 0.7% increase in US core PCE prices and 0.4% hit to GDP (US econ team had 0.3% core pce boost in their baseline)
Canada, Mexico, and China account for about half of all US goods imports.
Goldman’s Jack McFerran said weekend tariff shock would raise the US effective tariff rate meaningfully: “We had modeled a 7% overall increase from 25% tariffs on Canada/Mexico (though lower tariff on Canadian oil will lower this a bit). China would add another 1%.”
More context here:
Prediction markets early had a 30% probability of a major tariff increase in the first half of this year. The market-implied probability now – via Polymarket data – has jumped to 65%.
All in all, Trump’s weekend tariff shock announcement is to get major trading partners to the table to solve not just unfair trade – but also – stop fentanyl precursor chemicals from China, flowing into Mexico and Canada, then flowing into the US and killing 100,000 Americans per year.
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