If there is one phrase that seems destined to define the year 2025, it is “trade wars.” They’ve eaten up too much time, money, and investor patience. And when the long-delayed “mutual” tariffs on U.S. imports finally kicked in on August 7, it looked like at least a semicolon — if not a period — had been put on the whole saga.
However, the plot has taken another twist, as a U.S. appeals court has ruled that most of the tariffs introduced by the Trump administration were illegal. But the S&P 500, Nasdaq, and other indices have barely budged, as the tariffs will remain in place until October 14, giving the White House time to appeal to the Supreme Court.
And this isn't the first time we've seen this tug-of-war. At the end of May, the U.S. International Trade Court ruled that President Trump had overstepped his authority and declared the tariffs illegal. But before the Nasdaq and Dow Jones could get carried away with optimism, the federal appeals court reinstated the tariffs.
It’s understandable, then, that neither the U.S. President nor the Treasury Secretary appear overly concerned, as they expect the courts to uphold the global tariffs. This could also strengthen Washington’s hand in negotiations with China, Mexico, Canada, and other countries where final agreements are still pending.
What would be best for the markets?
Trade liberalization is always better than protectionism. Higher import tariffs damage relations with trading partners (just look at the recent friction with the EU, India, and China) and fuel domestic inflation, as most of the added costs are ultimately passed on to U.S. consumers and businesses.
The negative impact is already being felt. July data revealed that the core PCE price index — which excludes volatile food and energy prices — rose 2.9% year-on-year, following a 2.8% increase in June. In monthly terms, the PCE price index and its core counterpart rose 0.2% and 0.3%, respectively.
Another consequence of the ongoing trade wars, which we are already witnessing, is falling demand for U.S. Treasuries and a broader withdrawal of investments from the country. The risks? Yields could remain high even if the Fed cuts rates, the dollar could weaken, and the S&P 500 could turn negative.
Now, if the Supreme Court also overturns most tariffs, the federal budget may have to reimburse hundreds of billions in tariff revenues. Since taxes are politically untouchable, the most likely alternative would be to accelerate money printing, which could also put pressure on the bond market.