The Decisive | Season 3 Ep.7 - Trump's First 100 Days: Outlook and Potential Impact

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Kristen Hallam   00:00:00

What key priorities will the new Trump administration and Republican majority Congress emphasize as they embark on their first 100 days? How will these initiatives shape the U.S. economic landscape and influence the operational environment? Our experts will offer insights on these and other questions that are front of mind since President Donald Trump began his second term. My name is Kristen Hallam. To discuss these themes, we are joined by the following experts from S&P Global Market Intelligence. Ben Herzon, Executive Director and Co-Head of U.S. Economics; Amanda Eglinton, Associate Director, Pricing and Purchasing; and John Raines, Director and Head of North America Country Risk. John, let's start with you. What are our expectations regarding Trump's trade policies? What is he doing? What will he do? When will he do it? And how is he doing it?

John Raines   00:01:17

Honestly, we've seen this over the last few months. So lots of threats of instituting new tariffs. And with Donald Trump, he says that he was going to do it, and he's going to do it. He's been campaigning on this for a while. And so what we've seen is that when it comes to tariffs, I kind of break it down into 3 different buckets, right? So the one is everyone is screwing us argument. And this is the argument that Donald Trump has really been using since the 1980s. It's Japan initially, then it's China, then it's this group and that. I think the big difference between Donald Trump and other folks is it's really geared towards whichever country out there has a trade surplus with the United States. So it doesn't really draw as many distinctions as you might. The big difference here is that I think that we saw this a little bit with Lighthizer's comments was last year actually, former U.S. trade representative is that when it comes to tariffs for Canada and also Mexico, their economies are interwoven with the United States. So it's very difficult to raise tariffs there. Part of the reason why in our original forecast, we had that we thought that the possibility of tariffs against Mexico and Canada were probably not going to happen or if they happen, they were going to be far less than advertised was for that very reason, but more likely that we would see tariffs against other countries such as China, which is what we've seen, such as the European Union, which he's threatening. So that's where we're coming from when it comes to that basket. As we go forward and as we see these reports that come in after April 1 from Commerce Department, Treasury Department, USTR, we're likely to see some issuance of new tariffs, even the potential for recommendations of general tariffs across the board as an outlet to remedy some of these trade imbalances. It will be interesting to see what happens with Canada and Mexico because, of course, those tariffs have only been delayed a month. So that's the first basket. The second reason why Donald Trump has really advertised tariffs is the idea that this is raising revenue, right? And we're going to use this revenue to pay for social programs. We're going to utilize it to pay for tax cuts. We're going to use it as a sovereign wealth fund. So these have all been advertised in the future. And why that's important is really to do that in an effective manner or at least the best way to do it is really through legislation. So we have all of these bills, 1 bill, 2 bill going through budget reconciliation within the House and then looking towards the Senate. And the question is, do they put a general tariff in that bucket as a remedy to pay off some of these other tax cuts that they're thinking about for the future. Remember, the tax cuts of 2017 run out in December of this year. And so therefore, they're going to have to pay for that in some manner or fashion, somewhat. There's a lot of different rules involved with it. But one thing that would certainly help is if you had a new source of revenue and tariff is one where that they can achieve it. And then finally is the last bucket, and that's really for these kind of ad hoc foreign policy or economic policy decisions that come out of the White House. And we've seen that with Colombia over just even the last weekend, where all of a sudden, we had the issuance of tariffs, 25% tariffs that we're going to increase to 50% if you don't take military flights into that country. We've heard them talk about the possibility of introducing these tariffs on Russia to get them to negotiating table. The idea of those tariffs is you do them quickly, you get your foreign policy objective done and then you retract these tariffs as quickly as possible, right? So you utilize them as an implement in foreign policy. Obviously, if you don't get what you want, they stay on longer, but the idea is that it's not necessarily to transform the trade relationship, it's to get some other type of objective.

Kristen Hallam   00:04:47

I know we're going to talk a little bit about foreign policy. Right now, I want to ask about our expectations regarding Trump's immigration policies. What can you tell us, John, about, again, what is he doing? When will he do it? How will he do it?

John Raines   00:05:02

I think what you've seen is that at least as far as the rhetoric goes and as far as the initial overall theme of what Trump wants to achieve on immigration, it's pretty clear cut, a pretty stark reversal as far as the attitude of undocumented immigrants within the United States. Now it's a little bit debatable as far as the overall numbers. We've seen arrest numbers go up. That being said, some of these folks have been released back into the country just because they don't have places to put them. The overall atmospherics are one of really where Biden was really much a catch and release type mentality that if you hadn't really been convicted of a crime, most likely, they were just going to look the other way. That mentality is really going to shift, especially once Congress provides enough funds for the administration to be able to house these individuals. But you get the general view of traffic. And obviously, that's going to have wider implications for businesses because what we're already starting to hear about is this anecdotal evidence of people not showing up for work due to the fact that there's been some misinformation on social media saying that there's going to be an ICE raid at this location or they just saw ICE agents. And obviously, that could have impact for certain sectors. And the ones we're looking at most include residential construction, construction in general, or really smaller projects that are likely to be hit, hospitality, health care and agriculture. But it's a different ball game here. And I think one thing that they're going to continue to push, and again, as you mentioned before, likely to see it not only on the domestic front, but using it as an opportunity to engage in form policy, but with Colombia. We've already seen it with Central America, and we saw it really over the weekend with Venezuela, too.

Kristen Hallam   00:06:32

All right. And one more for you, John. Where do you see potential obstacles for Trump as he pursues these policies? And how might he address those obstacles?

John Raines   00:06:44

Right now, he's just avoiding that. I mean he's swerving around those obstacles and doing pretty much what he wants. And that's not been in all cases. But generally speaking, I think in some ways, it's easier to talk about what is not an obstacle here. So the first thing that we saw during his first term is that he doesn't have administrative officials that are trying to basically curtail his overall agenda. Remember, the first time, it was CEOs, it was generals, not this time. These are loyalists. They're going to do what he wants them to do. And so therefore, we're starting to see a far more aggressive policy than we've seen previous. The second thing we're starting to see is, of course, the bureaucracy. Last time, the bureaucracy, again, often stood in his way of implementing his overall agenda. This point, we've seen moves by Elon Musk and others to say, "Hey, listen, we want you to get in line. And if you're not going to get aligned with the policy, you really need to start thinking about a different line of work." And then finally is that balance between the executive and the legislative -- right now, there have been some very questionable moves by the Trump administration. What we haven't heard really is the Republican Congress saying, "Hey, listen, this is a step too far. We think you should rethink this." Maybe with the exception of the executive order with loans and grants, where I think there was some blowback there. In that instance, I think you saw the administration backtrack primarily due to this criticism or concerns that we saw coming out. Right now, not seeing it at this point, it's pretty much an open door, and I think he's going through it. That being said, if we're looking for opposition, we did see a bit when it came to the tariffs that primarily came from the business community. We saw that from the Chamber of Commerce coming out against the tariffs against Mexico and Canada. We also saw it with The Wall Street Journal. Other publications were Republican-friendly publications saying, "Hey, listen, this trade war is not a good idea. It's something you should not advance." Donald Trump said he didn't listen to those. In fact, he truth about them saying he didn't consider them. But at the end of the day, those tariffs did not go ahead. So business community, very important. Donald Trump does not want to end up a Herbert Hoover. He continually says that does not want to lead the U.S. into recession. Two, the judiciary, obviously, there is a 6-3 majority on the Supreme Court that are conservatives, 3 of which were appointed by Donald Trump himself. That being said, we saw during the 2020 campaign, there were times that the Supreme Court said, "You know what, we're not going to buy that. We don't believe this argument and then they sent it back where they actually rejected the arguments of Donald Trump. So it will be interesting to see. Obviously, they gave him some leeway when it came to the immunity ruling from last year. But that being said, when we saw with Chevron, which is a regulatory decision, a lot of that power that they had that came from that decision went directly to the judicial system to the courts. Do they want to give that power back to Donald Trump? Most likely not. So it's going to be a little bit of a give and take, and it will also be to see how much leeway they want to provide Donald Trump because they don't want to necessarily get into a fight with him in a way that he feels like he's going to ignore an order or something of those means. So it will be an interesting dynamic, but that's another area of opposition. And finally, it's the public. We're going to see continuing protests in the United States as many of these policies get implemented. Some of those are going to get large. That could be an issue, looking at polls, right?

Kristen Hallam   00:09:46

Let's pivot to the economy. Ben, how have we factored in trade policy expectations into our forecasts? And what impact could that have?

Ben Herzon   00:09:59

So let me first talk about the assumptions. And things are changing rapidly. So what I'll do is I'll describe what we have in our January baseline forecast. We're updating our forecast in light of recent events. But let me just start with what we already have in the forecast. In short, we assume that the Trump administration imposes universal tariffs on all imported goods. Now in particular, we assume that a 30% tariff is imposed on imports from China and a 10% tariff is imposed on imports from everywhere else in the world. Now this might not be exactly how the tariffs take shape, but this is a starting point for us. That's our assumption. So let me turn to what these assumptions mean to the forecast. Now we assume that these tariffs get phased in over the year, so they ramp up. And what tariffs do is they raise the cost of imports. And as such, tariffs are passed on to domestic prices in accordance with the import content of domestic goods. So what happens is as these tariffs are assumed to ramp up over a year or so, this leads to a period of elevated inflation. So instead of like measures of core consumer inflation easing up to 2% as that had been the case in our prior forecast, inflation turns back up. And in our baseline scenario, core consumer inflation temporarily rises to nearly 4%. There's more implications here. What this does is that it prompts the Federal Reserve to pause its easing cycle. So the Fed last year had embarked on an easing cycle, a recalibration as they called it, because Fed policy currently is tight and they want to move in the direction of a neutral stance of Fed policy. In previous forecasts, we had the Fed easing all the way to the terminal federal funds rate by early next year. But what's happening now and what they're communicating to the public is that they're thinking about pausing, pausing the easing cycle. And that's what we think is going to happen. We think as the tariff-induced inflation rises this year, the Fed will pause its easing cycle. And they're going to do this because the Fed needs to be concerned about an unmooring of inflation expectations. That is if -- as inflation rises, inflation will be elevated for about a year as tariffs ramp up. during this period, if businesses and consumers begin to expect that inflation will continue, that will get worked into the inflation dynamic, and it will create more of a problem for the Fed than the Fed currently has on its hands now. So if inflation expectations begin rising, become unanchored, that's a problem for the Fed. So what we think is going to happen and what we have in our baseline forecast is that the Federal Reserve pauses its easing cycle until it's convinced that inflation expectations won't become unmoored and that inflation will return to its path of 2%. Now with the Fed on hold, what that does is it raises Treasury yields. It raises interest rates higher than they would otherwise be. This translates to a broad financial tightness that wouldn't have occurred in the absence of tariffs and inflation. And it contributes to a slowdown in U.S. growth. We had been forecasting a slowdown for a while. But with the tariffs and the inflation and the financial tightness do is it contributes to the slowdown that we've been expecting.

Kristen Hallam   00:13:23

Thanks for that context, Ben. And Ben, what about the administration's immigration policy? How have we factored that into our forecast?

Ben Herzon   00:13:33

That's a good question. Currently, there are by different estimates, there are some 12 million undocumented immigrants residing in the U.S. We assume that the Trump administration reduces net migration into the United States by about 500,000 per year for the 4 years of the Trump presidency. So this doesn't mean that the administration is expected to deport 500,000 people per year. But what it does mean is that 500,000 per year should be thought of the combined effect of a reduced inflow of immigrants at the southern border, combined with deportations. And those 2 sources add up to 500,000 per year. So what this does in our forecast is that it reduces aggregate demand directly, where we will see the hit to aggregate demand is in housing and consumption. So with the lower population, there's less of demand for houses and housing starts. And with fewer people consuming in the economy, consumption demand is lower. And this also will lead to labor shortages in industries that are most affected by an outflow of immigrants. And these shortages probably will lead to a wage inflation that will reinforce the price inflation that's directly brought about by a ramping up of tariffs.

Kristen Hallam   00:14:57

All right. Thanks, Ben. So we're going to give the metal fans some of what they want, Amanda. -- tariffs on steel and aluminum have been in place since the first Trump administration. Why are metals being targeted with regards to tariffs again?

Amanda Eglinton   00:15:15

Yes. Thanks, Kristen. So I think the big reason that we're seeing this now is because when the 232 tariffs were initially announced, it was a blanket tariff on all steel and aluminum imports. But we've seen a number of carve-outs over the last 7 years since these were imposed. Almost right off the bat, we saw some exemptions announced for Korea, Brazil and Argentina, where all 3 countries agreed to an absolute quota based off of 70% of historical imported volumes between 2015 and 2017. And in place of that, having agreed to a quota, they would not be subject to any tariffs. So when we look at imports from some of these countries, South Korea is a really big source of imports of flat steel products as well as pipe. And Brazil is a really important source of imports of things like pig iron and steel slab. So getting those exemptions, while, yes, they are limited to a quota and that can restrict overall supply coming in. That is a good amount of supply that is able to come in tariff-free. We also then subsequently saw exemptions granted under the first Trump administration for Mexico and Canada in May of 2019, where both countries were exempted from tariffs. We have recently seen some additional melted and poured requirements come into place for both countries where steel and aluminum has to be produced domestically in order to qualify for that tariff-free import. But nevertheless, these are 2 of our biggest steel and aluminum trading partners. So getting those exemptions also carved out another big source of supply. We subsequently saw under the Biden administration then as well grant exemptions to 232 tariffs for Europe, the U.K. and Japan in the first half of 2022 and then subsequently granted some exemptions to India for certain products as well in 2023. So again, those are some of our largest steel trading partners, important sources of steel and aluminum imports. And so that just by itself has essentially made around half of the U.S. steel imports no longer subject to tariffs. In addition to that, under the 232 scope, there was an exclusion process that was announced, interested parties that saw that specific types of steel or aluminum that they were importing was either not available in sufficient quantity or at a high enough quality could apply for exclusions and in some cases, be granted those exemptions as well from other countries and not have to pay the tariffs. These 3 different actions did carve out a large chunk of imported supply that was no longer subject to tariffs. In addition to that, because the 232 tariffs were only applied on upstream steel and aluminum products, we did see a shift in imports going more down the value chain. So if you have to pay more to bring in steel and make fabrications or fabricated metals here in the U.S., we saw a shift in imports where we saw an increase in imports of fabricated metals and fabrications coming in to get around those tariffs. So what do we think is going to be different this time around? One, there is likely to be far less carve-outs. So already when the initial announcements of tariffs on Mexico and Canada were announced, steel and metals were going to be included in that once again. The good news is in the case of Canada, there was lower 10% tariffs announced for energy and energy products as well as critical minerals, which would include things like nickel and aluminum, amongst other critical minerals. So there was a little bit of reprieve there. But overall, we do expect fewer exemptions and exclusions -- this time around, President Trump has also said that he intends to target copper and copper products, which were not previously covered. And we do expect them to go after, again, more of these fabricated metals, which were previously not included in the scope in order to prevent that sort of move in imports from going downstream and hurting demand from some of the downstream producers. So that's why we're seeing this time around, and I do think that it will be a little bit more broader reaching this time.

Kristen Hallam   00:19:25

Thanks, Amanda. Great insights there. And Amanda, which other industries are most likely to experience disruptions in response to changes in tariffs? What are the key factors to look at there?

Amanda Eglinton   00:19:40

Yes. The automotive market is one of the first ones that people talk about just because of the amount of cross-border trade that happens in automotive supply chains. We're likely to see a hit to nonresidential construction, residential construction and business investment, just given the uncertainty around domestic policies and overall demand as well as the risk around higher financing costs with interest rates staying higher for longer and the risk of higher labor costs and material costs just resulting in some project delays and/or cancellations. The energy sector is another one where not even really including the potential for the tariffs going on oil and gas imports coming from Canada or Mexico or retaliatory tariffs on U.S. energy exports. But the energy sector would be particularly exposed to the removal of some of the exemptions for the 232 tariffs on steel, especially if we think about OCTG, what you need to drill your oil and gas wells. South Korea is the biggest source of OCTG imports to the U.S., Mexico, Canada, Brazil, Europe, Japan as well. So if we were to see some of those exemptions go away or the quota allowed for a country like Korea or Brazil reduced, then that can definitely raise the cost of drilling those wells. Europe and Japan, 2 major sources of API grade sheet and plate. Japan, historically a very important source of Super 13 chrome, certain very niche products coming in. So the energy industry would be exposed to those types of disruptions. When you look at the electronics and electrical equipment sector, this is another one with a lot of exposure to imports. And while a lot of the industrial electronics and electrical equipment from China have been subject to 301 tariffs for a while, previously, a lot of consumer electronics, things like computers, laptops, cell phones, these were all previously exempted from 301 tariffs, did not have tariffs on them previously. So if we do see, again, this 10% tariff going on all goods from China, you would expect to see a big hit there in a lot of those consumer electronics. Other sectors, paper and packaging. The U.S. is pretty dependent on imports of raw materials to produce packaging, things like pulp, corrugating mediums, linerboard. So we would see some disruptions there. And then you also have things like building materials. The U.S. imports around 25% of its lumber, 80% of which comes from Canada. So if we see tariffs there, you would see an impact on lumber. In addition to cement, the U.S. imports around 20% of its cement, Mexico and Canada combined accounting for about 30% of those imports. So again, if we see tariffs go on there, you would also see a hit to your overall construction and building costs as well.

Kristen Hallam   00:22:32

Wow, lots to keep an eye on there. Thanks, Amanda. Let's talk about the U.S. dollar for a minute. Ben, what can you tell us about our current assumptions about the strength of the dollar for this year? And how might changes in trade and immigration policy impact that?

Ben Herzon   00:22:51

Sure. So let me talk about the dollar forecast. Since late September, the dollar has appreciated something like 5% against a trade-weighted basket of foreign currencies. Now this appreciation has corresponded very closely with a rise in U.S. Treasury yields. And what's going on there is that when U.S. Treasury yields rise, financial capital shifts into dollar-denominated assets. That raises the demand for the dollar and strengthens the dollar. In our January forecast, the dollar -- so for this -- just focusing on this year, the dollar reverses some of that appreciation, but not all of that appreciation, so it remains elevated. Now this partial reversal reflects some easing in U.S. Treasury yields from their current levels and this easing in Treasury yields happens as you get into the forecast as the eventual Fed easing gets priced into Treasury yields. Now as far as how would trade policy affect the dollar forecast, the more severe are tariffs that is the higher the tariff rate or the faster they go into place, the more inflation we'll see in the near term and the tighter Fed policy would have to be in response. But tighter means we're not expecting the Fed to reverse course and begin raising the federal funds rate, but it might mean an earlier pause and might mean a longer pause or it might mean market expectations for a longer pause. And each of those events would lead to higher Treasury yields and probably a stronger dollar.

Kristen Hallam   00:24:24

Thanks, Ben. John, what are the potential scenarios regarding a government shutdown or confrontations over the debt ceiling?

John Raines   00:24:36

There are many, indeed. Right now, we are looking at the prospect of a government shutdown that would happen in mid-March. The government was funded until mid-March. There was a big question as to how long Republicans wanted to push off government funding maybe until later in the year or earlier in the year. And the general feeling with Republicans was they want earlier in the year because they're going to control all the different elective bodies within the U.S. political system. And at that point, they could really set the budget in terms of really more geared towards their goals. But that being said, be careful what you wish for because this situation is going to be confronting them in a little over a month. Now the situation here is that they can pass the bill on their own. They do have the votes to do it. It is very tight in the House. I think it's just one vote at this point. That will expand in the next few months as we have special elections. But right now, the margin of the House is razor thin. And what that means is they need to get everybody on board to be able to get funding past that point. And if they can't, they're going to have to rely on Democratic votes. And it should be noted that this has been a historic trend that Republican speakers have had to rely on Democrats in order to be able to get government funding. And I think the Democrats are likely to play hardball here. So they're going to require disaster relief for California, reopening USAID, education department, depending on what happens there, full funding there, the access to records issue, they're going to require a lot and maybe even to go down like the clean climate provisions. But whatever they're asking for, it's going to be a bit of a tough pill for the President to take. And so I could see some brinkmanship occur there, and I could see some real divisive argument start to erupt. And at that point, the probability of a government shutdown increases dramatically. And it should be noted that these type of shutdowns, especially when we have this kind of polarization within the United States right now, these things can last quite some time. They can last several weeks, they can last a month or even longer. And so the question for how long is one that becomes very relevant because, of course, we're going to have lots of government contractors that we were not going to be receiving their money. We're going to have lots of government employees on furlough beyond the ones that we currently have. And then on top of that could affect obtaining licenses, getting government approvals. Finally, part of the reason why this thing could last longer is there's a lot of ideological Republicans that say, "Hey, listen, having the government shutdown is not the worst thing in the world because it's one way to really control government financing and really get things moving in the right direction if you want to start balancing the budget. So watching that very closely. Looking at the possibility of a debt ceiling fight, we are already starting to see the use of extreme emergency measures to avoid an actual U.S. default. Again, our baseline view is there's not going to be a default. I don't think Democrats want that. Certainly, the Republicans are not going to want that. So I do think that you're going to have some type of resolution here. The question is that if we start having brinkmanship on government funding, and this is coming at a similar time, almost simultaneously as the debt ceiling fight, we do, again, like we've seen in the past over the last few years and decade even, brinkmanship over the debt ceiling and resurfacing one again. And I think ultimately, at the end of the day, everything is going to get smoothed out. I don't think the U.S. defaults, but I do think it brings up this idea is how long this can be extended.

Kristen Hallam   00:27:47

And as promised, we're going to get back to foreign policy. John, what consequences will the reemergence of an America-first foreign policy have for U.S. international relations?

John Raines   00:28:02

It is a great question. I really wish I had a great answer. It's going to be transformative to put it mildly. I think the big thing that we're seeing here is really that post World War II consensus at this point, if it's not dead, it's comatose and not in great shape. They called in the family at this point. Because I think that when you think about Joe Biden, it's a little bit of an aberration of what we've seen over the 2 terms of Donald Trump and now Donald Trump 2 is that really, at this point, this idea of working together, multilateralism, America is back. At this point, it's hard to guarantee that's going to be the recipe that the United States is going to pursue regardless of whether you have a Democrat or Republican in office going forward, specifically speaking about America First. What does it mean? One thing is defining what it's not. I don't think it's a situation where it's completely revisionist and is doing something that wants to expand and invade Mexico. I don't think that's the guarantee. But I think that there's core components here that say it's certainly not an isolationist. So we're not seeing a form policy here, which says we're going to retreat within our borders. What we are seeing is a foreign policy that says, I'm no longer going to commit myself to international engagement. So I'm not necessarily going to be giving money to UNESCO. I'm not going to be part of the Paris Climate Agreement. I'm not going to be part of the WHO. I'm no longer going to be giving substantial amount of funding to the UN. Those days are over. If the world wants to work on these issues multilaterally, it can, but it needs to stop relying on the United States to provide all the funds and the ambition for these institutions to reach these type of goals. In fact, these institutions most usually are utilizing U.S. resources to achieve ambitions that are actually contrary to what is best for the United States itself. I think that's part of parcel of what he's seeking here when he makes these announcements and executive orders over the last few weeks. The other aspect of it is it's really focused in on what I would consider like neomercantilism. So it's the idea of we've spoken about trade before, but it's really that we've got to end the situation where not only are other nations using the United States for multilateral agenda items, but they're also using themselves to be able to get rich and pay for their social welfare programs. That's got to end, and it's going to end with Donald Trump. And I think you hear that again from the pronouncements one after the other, even in respect to the tariffs that were going to be levied against Mexico and Canada, even those were veiled in security terms, one thing they constantly spoke about was the imbalances in trade and how those needed to be corrected. The other thing is that I think that we're starting to see with Donald Trump 2 versus Donald Trump 1 is really this idea of regional security and regional power projection. So we've seen it in Panama, in the United States must control the canal. We're already seeing acquiescence there by the Panamanians when it comes to some of the Chinese concessions there. And then secondarily, the issue with Greenland and what happens in other parts of the world and U.S. security provisions and other aspects that I think you're going to see really rise to the top that these are important elements and then the use of economic unitive diplomacy in order to reach those in. So I think that's all part and parcel of what he wants to achieve. The United States is in a different realm now. And the idea that it's willing to have large trade deficits to really pay for the defense of others, maybe it will occur under a future Democratic administration, but it can't be guaranteed. And it means that they need to start approaching foreign policy in many of the same ways, at least dealing with the United States, that the United States deals with them. So it's going to be far more transactional, agreements that are far more short-lived and far more based on unitary action that they need to take for the viability of their own endeavors instead of relying on the United States to achieve their own. So I think that's all going to be part and parcel of the way that we are going to see European and Asian partners approach not only economic relations with the United States, but also security relations, too.

Kristen Hallam   00:31:52

All right. Thanks, John. Lots to unpack there. Amanda, I've got an America First question for you as well. What consequences will the reemergence of an America First foreign policy have on industrial supply chains? And what lessons can we take from the prior round of tariffs imposed in 2018, 2019?

Amanda Eglinton   00:32:15

Yes. What we saw the last time was the initial reaction to the tariffs was for everyone to hoard supply. So everyone rushed to buy at the same time, and that did lead to a spike in prices over a 6- to 12-month period, really well beyond what was needed to cover the cost of the tariffs because of that sort of hoarding behavior. Now what could be slightly different this time is the fact that, one, putting tariffs on into a slowing demand environment, as is the case now, is very different than putting tariffs on into a strengthening demand environment like we saw in 2018, 2019. We also have higher financing costs, higher warehousing costs that might blunt some of the hoarding activity that we've seen -- that we could see as well, and that could help prevent some of those big spikes in prices from occurring. And then the other thing is that U.S. domestic prices for a lot of industrial goods are significantly, in many cases, significantly higher than prices in the rest of the world, much more so than they were prior to the tariffs that went in place in 2018 and 2019. So while the price of those imports may rise, in a lot of cases, imports are still likely to be somewhat competitive or very competitive. And you will likely still see imports coming in even at a higher cost, and it won't necessarily cause as much upheaval in supply chains as we saw the first time around. Supply chains have been through a number of events since the 2018, 2019 tariffs. We had COVID disruptions, which were far more disruptive than the tariffs initially where the Russian invasion of Ukraine. Supply chains have become more resilient to a certain extent since 2018, 2019 as well. But what we're likely to see is if it's not a blanket tariff, we'll see imports, import substitution. So if certain countries are targeted and others are not, you'll likely see imports move to some of those countries that are not being targeted. And you could also see imports move down the value chain. So if you target more intermediate upstream or intermediate goods, you could see imports shift down more into finished goods. You're also likely to see the countries that are facing tariffs that either they will divert tonnage to other markets or more supply will just remain back in that exporting country. So if we think about what happened with the 232 tariffs, Europe put in place their own steel safeguard tariffs to prevent the tonnage that was being diverted from the U.S. from flooding into the European market. So that's the type of diversion that you could see take place. And in many cases, with this diversion or key exporting markets facing lower export volumes, that can put downward pressure on prices in some of those markets as supply is more elevated. And that can actually lead to some good buying opportunities in Europe or Asia in converse to the higher prices that you're likely to see here in the U.S. And then finally, you're also likely to see increasing protectionism in the rest of the world as other countries again try to wall themselves off from big increase in exports from countries similar to trying to prevent that sort of diverted tonnage from coming in. And one here that we could particularly point to is an example of Chinese steel. So Chinese steel exports in 2024 rose to the highest levels since 2017 because of weak domestic demand in China and overcapacity in the market. So what we've seen over the last year is a big increase in antidumping investigations in other countries across Asia and other developing markets, especially to try to prevent, again, some of this excess supply from finding their way into that market. And as a result, you just see much greater regional price variation than would normally be the case. And so again, it can create buying opportunities in some markets, and it's something that buyers really have to be on top of to make sure that they're taking advantage where they can and looking to buffer against those higher prices where they can.

Kristen Hallam   00:36:15

All right. Thank you, Amanda. So now for a lightning round of Q&A, Amanda, we'll keep you on the hot seat. Looking at the future of tariffs for Canada and Mexico, what happened last time? And what are the lessons learned from that previous round?

Amanda Eglinton   00:36:35

So when the 232 tariffs were announced in March of 2018, initially, Canada, Mexico and Europe were exempted from them as other trade negotiations and discussions took place. But as those discussions broke down and hit some road bumps, we did see President Trump go in and then put those tariffs in place on both countries in June of 2018. So they didn't go in initially, but then 3 months later, we did see them go on. And then they remained in place until May 2019, just under a year before a deal was reached. Just given the amount of trade, you would expect that they wouldn't be able to stay on very long given the disruptions. But in fact, they did stay on for almost a year in the last go round.

Kristen Hallam   00:37:20

All right. And one more for you, Amanda. How about copper? You mentioned that earlier. could they target imported copper with the need to grow our AI data center footprint?

Amanda Eglinton   00:37:32

That is one that President Trump has said that he would look to go after eventually, maybe not right away, look to put tariffs on copper and copper products. And that's really the fly in the ointment. Is it just refined copper cathodes? Or is it things like copper wire, copper pipe and tube, copper foil, some of those downstream products. Again, the last time we didn't really see tariffs on a lot of those fabrications and midstream products. And if we were to see that happen this time, then again, that would be far more disruptive. Again, I think while it would certainly lead to higher prices here domestically, I think the goal would be that it would also spur investment in building out more domestic production capacity to produce those goods as well.

Kristen Hallam   00:38:17

And Ben, coming to you next, scenario outlooks for inflation based on various tariff outcomes?

Ben Herzon   00:38:26

Yes, good question. There's a lot of uncertainty about how high tariff rates will go, how fast we'll get there. This week was a perfect example about how it's really difficult to settle on our assumptions for what tariffs will be. So to address that, we've got alternative scenarios that we issue once a month. Starting with our January forecast, we recast what we call our optimistic and our pessimistic alternative scenarios in terms of policy uncertainty in an effort to bracket outcomes, macroeconomic outcomes in response to uncertainty about trade policy and in particular, tariffs. So in an optimistic scenario that tariffs would not be nearly as extreme. So instead of like tariffs on imports from China rising to 30%, they rise to 20% in the optimistic scenario. And instead of new tariffs imposed on imports from Canada and Mexico, we assume in the optimistic scenario, there's no new tariffs on imports from Canada and Mexico. And instead of a 10% universal tariff, the optimistic scenario assumes a 5% tariff. Now in that scenario, inflation instead of rising to nearly 4% rises to only 3%. And so the Fed does not have to respond as much, does not have to keep rates on pause for as long, and that's a more optimistic outcome. There's uncertainty on the other side as well. So in our pessimistic scenario, we assume that the tariff rate on imports from China rise to 40% and then the universal tariff on -- including Canada, Mexico and the rest of the world rise to 15% instead of 10%. And in that scenario, inflation peaks just above 4%. There's a lot of uncertainty about how high tariffs will go, but like sort of a reasonable range for inflation, this is on a 12-month basis, would be anywhere from peaking at 3% in an optimistic scenario to peaking at 4% or higher, a little bit higher, in a pessimistic scenario.

Kristen Hallam   00:40:20

All right. Thanks, Ben. And we've got time for one more. John, coming back to you. What will Trump's role be in the potential ceasefire of the Russia-Ukraine conflict?

John Raines   00:40:31

Yes, it's a great question. What's going to happen with Ukraine? And do we start seeing a very strong position by Donald Trump against Russia to force them to the negotiating table? Right now, what Trump envisions for a ceasefire is one whereby really, there's a DMZ, a line of control. You'll have European troops there, British troops there and the U.S. providing some type of weapons to create some type of de facto border between the Ukrainians and the Russians. And Vladimir Putin at this point does not really envision that at all. He envisions a very different situation for Ukraine where they're demilitarized and you can pretty much call the shots as to their future foreign policy. So I think right now, our forecast is that most likely you're going to have some type of negotiations going, but it's going to be very difficult to come to a firm conclusion because at this point, it's difficult, we believe, for Putin to recognize that fighting is not necessarily worse than some type of negotiated solution, which might leave him in some type of adverse situation. You might as well keep fighting as long as you feel like you might be winning. So the big question for me here in that wildcard is, does he really become quite forceful if he believes Russia is not negotiating in full honesty, in recognition of the difficulties here. Does he really start to raise tariffs and sanctions? Or does this thing play out for a number of years? But at this point, one thing we do know is that he does want to get involved with these negotiations. And he does feel in some ways or at least this is what he's told his allies, he does want to be recognized as a peacemaker and utilize this as propelling for his legacy going forward on the international stage.

Kristen Hallam   00:42:04

Thank you, John. And for those of you who want more on that, our latest episode of The Decisive features John and our Head of European Country Risk talking about Russia, Ukraine and NATO. We've given you a lot to think about today, and we are committed to continuing the conversation. Thanks to Ben, Amanda and John, and thanks to you all for engaging with us today until next time. Thank you for listening to The Decisive podcast from S&P Global. Please join us next week.