The 'Trade War' Is Back

Tit for tat on tariffs... China's response... Trade War, Part II... The market didn't care today... Trump compliments the Fed chair... A labor-market 'freeze'...

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Tariff talk has become reality...

As I (Corey McLaughlin) briefly discussed yesterday, President Donald Trump announced over the weekend that the U.S. would slap 25% tariffs on imports from Mexico and some from Canada.

By midday, though, he'd paused this tax on Mexican imports for at least a month. By evening, it was the same story with Canada. Both countries reportedly agreed to send thousands of their own troops to U.S. borders to help stop illegal immigration and the flow of illicit drugs.

The benchmark S&P 500 Index clawed back substantial morning losses yesterday to finish down just slightly.

But then there's China... Trump over the weekend also announced an additional 10% tariff on Chinese imports beginning today, with a White House statement giving these as the reasons...

Chinese officials have failed to take the actions necessary to stem the flow of precursor chemicals to known criminal cartels and shut down money laundering by transnational criminal organizations.

As we've been saying for months, Trump has been threatening tariffs with foreign nations as a negotiating tactic first to get concessions on other matters. But as of today, we're at the point where they are beginning to have real, potentially inflationary consequences.

Tariffs raise the costs for companies doing the importing. So in this case, American businesses must pay Uncle Sam more to import the same goods from the world's second-largest economy. How companies adjust is up to them, but higher prices for consumers is a likely outcome.

Think of things like cellphones and other electronics, toys, and appliances – the biggest Chinese imports to the U.S. – and the potential impact on companies that sell them here.

China's response...

Today, China responded with 15% tariffs of its own on some U.S. imports – as well as export controls to the U.S. As the Associated Press reported today...

China said it would implement a 15% tariff on coal and liquefied natural gas products as well as a 10% tariff on crude oil, agricultural machinery and large-engine cars imported from the U.S. The tariffs would take effect next Monday.

That's not insignificant for U.S. companies that could see a dent in export demand. But the good news is that those retaliatory tariffs will have a relatively limited impact, since China is not a leading destination of U.S. natural gas, machinery, or car exports.

However, this part of China's policy reply got my attention more, as the AP reported...

China announced export controls on several elements critical to the production of modern high-tech products. The measure took effect upon announcement on Tuesday.

They include tungsten, tellurium, bismuth, molybdenum and indium, many of which are designated as critical minerals by the U.S. Geological Survey, meaning they are essential to U.S. economic or national security that have supply chains vulnerable to disruption.

Since the pandemic, I suspect many people shudder whenever they hear "supply chains" and "disruption" in the same sentence.

This isn't to say wielding tariffs can't attain some of the White House's goals. But they do help form groundwork for a more volatile geopolitical and macroeconomic scene.

Trade War, Part II...

And, as of this writing, I haven't heard of any agreements on the sticking points like we did from Mexico and Canada yesterday. 

In the Oval Office this afternoon after signing a few more executive actions, Trump said he would meet with Chinese President Xi Jinping at the "appropriate time... We'll see what happens." He also said of China's retaliatory tariffs...

It's fine. We're going to do very well against China and against everybody else.

In the meantime, if this tit for tat with China sounds familiar, it's because it also happened in 2018... In his first term, Trump repeatedly raised tariffs on Chinese goods and China responded each time as a full-blown trade war escalated.

We could be in the early stages of another...

The Chinese government also said it would investigate Google for violating antitrust laws. I'm not sure exactly how this investigation will turn out. But it sure does signal that "Trade War 2.0" could put more companies that do business with China in the direct crosshairs.

(Google's search engine, e-mail service, and many other tools are famously banned in China. But many Chinese smartphones still use Google's Android operating system, and many Chinese businesses advertise to Western customers through Google's advertising platform.)

Another tech giant with a bigger Chinese footprint is Apple (AAPL). In the past few years, Apple has worked to diversify its production and supply chain out of China (diverting through India, mainly). Yet it still made approximately 85% of its iPhones in China in 2024.

Apple products were exempted from the first trade war, but evidently not this time. Our colleague and Stansberry's Investment Advisory editor Whitney Tilson wrote some about the potential impact of tariffs on Apple in his free daily newsletter today. You can read it here.

Individual companies' impacts are in addition to the broad potentially inflationary tailwinds involved here for the world's two largest economies... and the second-order effects on other nations or economies that we just can't predict with any certainty today.

Today, though, the market said 'meh'...

As much as tariffs on Mexico and Canada came as more of a surprise yesterday – reflected in a sharp sell-off in stocks on Monday morning, followed by a reversal after they were lifted – the China tit for tat didn't.

The major U.S. stock indexes were all higher. The tech-heavy Nasdaq Composite Index and small-cap Russell 2000 Index led, closing higher by more than 1%. Take your tariff concerns and stick 'em, Mr. Market tells us. Not quite...

Months ago, it looked like the market was "pricing in" this possibility. Longer-term bond yields (a signal of higher inflation and/or growth expectations) rose heading toward the election as investors increasingly bet on a Trump victory. The trends continued in the weeks after his win.

But today, the 10-year yield actually fell, as it generally has since the middle of January.

At the same time, all the uncertainty about what's coming next could explain the price of gold. This hedge against "chaos" and inflation has been making new all-time highs for four straight days, today trading up 1% to near $2,850 per ounce.

If we see more surprise developments in a U.S. trade war or any other major trading partner, expect more market volatility like we saw yesterday.

It may feel like it's hard to keep up...

If so, we don't blame you. All the developments coming out of Washington in the first few weeks of Trump's second term is like getting hit in the face with a firehose of information.

This afternoon in the Oval Office, Trump also told reporters that he "left instructions" with advisers to "obliterate" Iran should the nation assassinate him. Trump then met with Benjamin Netanyahu, the prime minister of Israel, Iran's top adversary in the Middle East.

These developments, and others, have overshadowed reports about the president's commentary on the Federal Reserve. To be precise, Trump praised Fed Chair Jerome Powell for holding interest rates steady at last week's central-bank meeting. Trump said yesterday...

I'm not surprised. I think holding the rates at this point was the right thing to do.

Also yesterday, for instance, news emerged of the White House's intention to launch a U.S. sovereign wealth fund by the end of the year, which could possibly buy social media platform TikTok. There's a lot to be said on this subject alone.

But for today, we just want to close with a new signal from the jobs market...

A labor market 'freeze'...

U.S. job openings fell again in January, to 7.6 million, according to the monthly Job Openings and Labor Turnover Survey ("JOLTS") from the Bureau of Labor Statistics.

New hires and quits – typically a sign that workers are seeking and getting higher-paying jobs (an inflationary indicator) – are still at late-2017 levels (excluding the COVID-19 irregularities).

In other words, folks aren't losing their jobs... But if you're looking for a job, you're probably having trouble. Job openings last month dropped by nearly 560,000, and as we've previously reported, the average duration of unemployment has been rising.

Put this all together, and it looks like a labor market "freeze" is continuing. The job market isn't cratering, but it has become much harder for people looking for a job to find one.

This environment potentially makes for a piece of evidence supporting rate cuts. If this labor-market trend holds and the pace of inflation falls, we might see the Fed take action to spur economic activity.

Though as with so much else in today's economy... it's impossible to predict whether either of those will happen.

New 52-week highs (as of 2/3/25): Agnico Eagle Mines (AEM), Air Products and Chemicals (APD), AutoZone (AZO), Alpha Architect 1-3 Month Box Fund (BOXX), Blackstone Secured Lending Fund (BXSL), Costco Wholesale (COST), Equinox Gold (EQX), Gilead Sciences (GILD), SPDR Gold Shares (GLD), Grand Canyon Education (LOPE), Meta Platforms (META), Sprott Physical Gold Trust (PHYS), Roper Technologies (ROP), Republic Services (RSG), Sprouts Farmers Market (SFM), ProShares Ultra Gold (UGL), United States Commodity Index Fund (USCI), Visa (V), and VeriSign (VRSN).

In today's mailbag, thoughts on potential next moves in a trade war... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"It isn't 'what' Trump is going to do. It is how his competitors 'react' (Canada and the [European Union], not necessarily Mexico or China). Everybody 'knows' what Trump is going to do: Let Mexico/Canada off the hook; Increase and maintain China tariffs; Rotate to EU.

"Nobody is sure about what [Canadian Prime Minister Justin] Trudeau and the EU [are] going to do, and [I think] that is where the danger lies..." – Stansberry Alliance member Bill B.

All the best,

Corey McLaughlin and Nick Koziol
Baltimore, Maryland
February 4, 2025

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