Tariffs have long been associated with trade, but their role as a negotiating tool has gained prominence in recent years. While tariffs are typically used to protect domestic industries by imposing import duties, they are increasingly being employed as leverage in broader economic and political negotiations.
The Trump administration's approach to tariffs exemplifies this shift. Rather than focusing solely on trade advantages, the administration appears intent on using tariffs to extract concessions across various issues. "We expect the Trump Administration to use and extend the Plaza Accord mentality," states RBC Wealth Management.
Tariffs can serve as a "pay-to-play" measure for countries seeking access to the U.S. market, which is characterized by high demand. Despite rising tariffs on Chinese goods since 2018, Chinese exports to the U.S. have remained relatively stable.
Historically, the U.S. has offered relatively free market access, benefiting American consumers with more choices at competitive prices. However, there is an alternative approach that involves seeking concessions from trading partners to ensure continued market access.
RBC Wealth Management notes that if tariffs are used primarily for negotiation, they may not need prolonged application: "A quick demonstration of power—or even just a threat—gets the concession." This tactic was evident when Colombia conceded after President Trump threatened significant tariffs over deportation disagreements.
The fluidity of tariff policy underlines its dual nature—absolute and relative—impacting different countries differently based on negotiated terms and exemptions. Larger companies might benefit due to their ability to influence policymakers and adjust supply chains swiftly.
While some investors might gain from this strategy, major U.S. trading partners could face negative consequences such as disrupted supply chains or economic impacts from temporary export halts.
The risk remains that aggressive tariff strategies could lead to misunderstandings or escalate into trade wars with adverse effects on global economic growth. The Trump administration's focus appears skewed towards short-term gains over potential long-term benefits or goodwill loss.
In conclusion, while using tariffs as a negotiating tool offers immediate benefits for some investors and sectors, it carries risks that may accumulate over time. As RBC Wealth Management advises, investors should remain vigilant about these evolving dynamics and adjust their strategies accordingly.