Tariffs and turmoil - markets react to Trump tariffs threat
LBS' Dr Joseba Martinez reflects on tariffs and the potential for trade disruption in the new Trump era
Earlier in the week (beginning November 25th) president-elect Donald Trump pledged, via social media, day-one tariffs of 25 per cent on imports from Canada and Mexico, and an extra 10 per cent on China.
Markets were shaken by the news, with Japan's benchmark Nikkei 225 Index and China's Shanghai Composite closing lower. Meanwhile, the UK's FTSE 100 opened down on the day before. Trump's tariff announcement also hit currencies. The Mexican peso weakened further against the US dollar Tuesday, and the Canadian dollar fell to its lowest level against its US counterpart since 2020.
London Business School's Joseba Martinez was quoted in Newsweek, commenting on the president-elect's plans to impose tariffs on products entering the US from Mexico, China and Canada.
Commenting on the stock market drop, Joseba Martinez, assistant professor of economics at the London Business School, told Newsweek that "trade protections like tariffs are generically bad for world GDP."
He added:
"Trade protections like tariffs are generically bad for world GDP. Supply chains between the US, Mexico and Canada are highly interconnected and these are big trade partners for the US, so taxes on these counties are particularly costly.
"The initial stock market rally priced in two things: probably positive effects on long run GDP from corporate tax cuts (although this is uncertain, because TCJA makes innovation comparatively more expensive), plus redistribution of the economic cake away from labour and towards capital, due to lower corporate taxes and the effect of reduced competition from the rest of the world increasing market (pricing) power of already powerful American firms.
"Plus reduced regulation, even lower energy costs, and other things that are good for capital, energy costs, and other things that are good for capital.
"From now on, what markets do from now depends on which faction of MAGA is ahead at any given time: nativist-mercantilists versus the opportunistic capitalists. Bessent is perceived as more of the latter, so the stock market loves that. Tariffs and deportations are the signature policy of the others, so the more salience these have, the worse for the stock market from now on. Overall, there will be a lot of volatility as these internecine fights play out."
