The US delayed tariffs against Canada and Mexico after initial sparring. Import restrictions on China remained. Will this trade war result in significant escalation or merely negotiations for deals?

On February 1, US President Donald Trump announced an additional 25 percent tariff on imports from Canada and Mexico alongside 10 percent on China which was followed by retaliatory responses.

A few days later, Trump said he would delay restrictions on Canada and Mexico after concessions on border security, an issue cited as a key reason for the tariffs. Meanwhile, import restrictions remained against China which responded with its own 10 percent tariff on the US.

Dealmaking for Trump

Most banks believe that the tariffs will act as a negotiating tool for Trump to win favorable deals for the US.

«Our views on trade tariffs remain unchanged. First, we largely see tariffs as a tool of negotiation tactics to reach other goals, namely tackling immigration and the opioid crisis. We still believe that tariffs are ultimately only temporarily imposed until politically acceptable solutions are achieved,» said Norbert Rücker, Julius Baer’s head economics and next generation research, in a note.

«The administration also came under pressure from business groups to avoid a confrontation with Canada and Mexico,» added UBS in a separate note, referring to the National Manufacturers’ Association comments about the need to protect «manufacturing gains» from the cross-border partnership. «In our view, the president is unlikely to want to alienate key constituencies in his voter and funding base.»

US-China Relations

While the US followed through with its 10 percent tariffs on China which responded with its own import restrictions (10 percent on select goods that totaled $14 billion in trade last year), some also view this as relatively benign and a sign of willingness to negotiate.

«China’s response leaves the door open for a potential deal between Washington and Beijing to avert a more damaging, broader trade war,» said Bank of Singapore’s chief economist Mansoor Mohi-uddin in a commentary. «US-China talks will thus be key for limiting downside risks to Chinese markets and the CNY. If negotiations are fruitless and US tariffs increase further, then financial markets will react more strongly this year.»