True to his word, US president Donald Trump is getting serious about trade tariffs with countries he believes are benefitting too much financially from America.
Mexico, Canada and China all face costly taxes on exports, the enforcement of which had been promised by Trump to begin from 1 February. He all but confirmed the European Union would face similar treatment, while the UK could escape the measures.
The president made bold statements and signed executive orders across the first weekend in February. Global markets faced an agonising Monday morning hangover as a result.
Overnight, however, Trump has since said he would, for the third time, pause or delay the 25% tariffs on Mexico and Canada for one month. China’s additional 10% will still apply from today.
But the impact of the overhanging tariffs can’t be forgotten. The markets yesterday were rattled and slumped hard, with Germany’s DAX down 2%, France’s CAC -1.9%, Spain’s IBEX sliding 1.7% and Italy’s FTSE reduced by 1.4%.
The US stock markets suffered the same fate, with fallout across the Dow, Nasdaq and S&P 500 as a result of Trump’s weekend threat. Share prices were down for PepsiCo Inc, Mondelēz International and the Kraft Heinz Company, among others.
Even with the tariffs delayed, if or when they come into force, F&B has had a taste of what’s to come. “These downturns are driven by investor anxiety about the broader impact of tariffs on the global economy, particularly as European economies are highly intertwined with US trade policies,” said chief investment officer Naeem Aslam at investment firm Zaye Capital Markets.
Some of Europe’s biggest food and drink brands like Associated British Foods, Coca-Cola Helloenic, Diageo, Heineken and Lindt’s shares dropped significantly as markets opened yesterday.
Diageo shares slump hard
For Diageo, this was as low as 3.1%, making it one of the top fallers on the London Stock Exchange and a growing concern for analysts. The company has battled with weakening revenues of late. Add to that 46.2% of its US sales are believed to be imported from Mexico and Canada, according to investment bank Jefferies, and the outlook isn’t positive.
“Businesses had ample warning that President Trump planned to introduce tariffs on Canada, Mexico and China but many were no doubt hoping the threats would prove to be merely rhetoric,” says Simon Geale, executive vice president at global procurement and supply chain consultancy Proxima.
“This hasn’t proved to be the case, and we are now operating in a world where these substantial tariffs are now in place. With retaliatory tariffs from Canada and Mexico, there is also the potential for further escalation, also with the EU in short order.”
How can businesses navigate Trump's tariff?
“Firstly, there is the initial step of managing the immediate impact of the tariffs. This involves analyzing current import structure and identifying which products will be affected by the new tariffs to understand the potential cost impact. It’s then about working out resilience and mitigation strategies. This will look different for every organization but may include optimizing product classifications, diversifying suppliers, adjusting supply chains and financial planning. Many businesses will have begun this work already but the implementation adds new urgency.
“The second area to focus on is the macro-economic impact. We don’t know if these tariffs will be in place for one week, one month or one year. There is certainly the potential that tariffs of this scale could have a cooling effect on the American, Canadian and Mexican economies. Businesses need to be prepared for that and start thinking through scenarios. If economies begin to slow down, what impact will that have on businesses? And in light of that are they in turn going to need to review their cost bases and spending more closely?
“Finally, every British/German business should be asking not only what impact these tariffs will have on them, but also thinking through what might happen if tariffs were levelled directly on the UK/EU. These seem to be imminent in the case of the EU, but President Trump has shown he is willing to take economic measures against close allies that previously would have been off the table under previous administrations – so no business should be naïve to the risk that issues could boil over in the future and put their country in the firing line when it comes to tariffs. Is this the start of an acceleration of deglobalisation and sharp price rises? Time will tell.”
Simon Geale, executive vice president, Proxima
Critics of the tariffs, such as BNP Paribas, have warned they would be brutal for the US economy and cause “inflationary shock”.
At first, however, BNP Paribas was uncertain whether Trump’s campaign pledges could be taken seriously. Once that was established, however, “the increase in tariffs were even larger and came faster than we had pencilled in”, the group said.
Consumer prices would rise sharply in the US over the coming months and tariffs would “put the breaks on economic growth”, the organisation added.
“The Trump tariffs are unprecedented,” says London School of Economics' professor of political science Stephanie Rickard.
Compensation for companies hit hardest by tariffs
“The US has a trade agreement with Mexico and Canada. Trump has effectively ripped up this agreement. By doing so, he’s undermined the credibility of the US and the value of its agreements.”
If tariffs are enforced and trading becomes difficult, industry could lobby for compensation from lost sales or jobs, she says. “For example, the European Globalisation Adjustment Fund could be deployed to assist producers and their employees negatively impacted by Trump’s tariffs.”
While Trump believes the US can withstand any retaliatory measures from countries and trading powers like the European Union, what action these states will take isn’t yet known, according to European Institute professorial research fellow at the London School of Economics, Prof Iain Begg.
“The EU will respond as a bloc, because trade policy is a competence of the Union as a whole. It would be a surprise if there is not already a plan for Brussels to retaliate, much as the Canadians have said they will,” he says.
It would be difficult to understand how the UK would be treated and what tariffs could be implemented across which sectors. Though Begg argues Trump’s view of trade is to look at the bilateral balances that target those with the biggest surpluses. “His administration might also go for products or sectors which exhibit imbalances,” he says.
Food and drink might respond to tariffs by pivoting and driving demand for local products, such as Scotch instead of bourbon or English wine instead of Californian.
Though it’s not only the price of goods set to be impacted by the tariffs. “Oil prices surged, led by US WTI, after Trump imposed significant tariffs on various imports, including crude oil from Canada and Mexico, raising concern about higher gasoline and diesel costs for US customers,” said a spokesperson from Danish investment bank Saxo.
This in turn could make it more expensive for manufacturers to make and ship products, placing additional cost into the mix.