Trump plans 25%+ tariffs on auto, chip, and pharma imports starting April, sparking global trade tension. With the US importing 8M vehicles in 2024 (50% of sales), this could significantly impact European and Asian manufacturers. As uncertainty rises, gold nears all-time highs, while the Fed holds rates steady amid inflation concerns, despite 77% of fund managers expecting cuts this year.
Trump's 25% Tariff Threat: Impact on Automobiles, Chips, and Pharmaceuticals
President Donald Trump stated on Tuesday that he is likely to impose tariffs of around 25% on automobile, semiconductor chip, and pharmaceutical imports, with an official announcement expected on April 2.
Furthermore, the tariffs on pharmaceuticals and semiconductor chips will be at least 25% and are expected to increase significantly within a year. However, Trump noted that he wants to give companies time before implementing the new tariffs, encouraging them to bring production back to the U.S.
If these tariffs are enforced, the automobile industry could be significantly impacted. In 2024, approximately 8 million cars and light trucks were exported to the U.S., accounting for about half of total vehicle sales in the country.
European manufacturers like Volkswagen and Asian manufacturers like Hyundai, whose U.S. sales rely heavily on imports, are among those that would be most affected. Additionally, Japan's automobile exports to the U.S. make up more than one-third of its total car exports.
Since taking office, the new U.S. president has not implemented as extensive or immediate measures as expected. However, he has maintained his persistent rhetoric on tariffs since his election campaign, suggesting that the U.S.'s trade partners could soon face a wave of tariff increases.
The 25% tariffs on steel and aluminum, announced earlier, will take effect in March, while the deadline for postponed tariffs on imports from Mexico and Canada is set to expire next month.
Work on reciprocal tariffs based on country-specific policies is ongoing and is likely to be announced in April. If all of these tariffs, including the latest one, are implemented, they could have a substantial impact on global trade, and any retaliatory measures by affected countries could spark a full-scale trade war.
On the other hand, Trump's statements lack details. For instance, it remains unclear whether the automobile tariffs will target specific countries or apply to all imported vehicles. Under the free trade agreement with Canada and Mexico, vehicles produced in these countries are supposed to be exempt.
However, Trump has implied that if he perceives trade relations as imbalanced, there may be little any country can do to avoid these tariffs.
Nonetheless, the European Union's top trade official is set to travel to Washington to negotiate exemptions, while Japan is making similar efforts and maintaining contact with U.S. officials.
At the same time, these countries have also made it clear that they will not hesitate to respond appropriately if the U.S. proceeds with its tariff plans. This suggests that Trump's tariffs will likely not go unanswered, increasing the potential for heightened trade tensions.
While this situation contributes to the uncertainty of the global economic outlook, the belief that tariffs will push U.S. inflation higher remains widespread---tariffs are paid by importers but are often passed on to consumers.
With inflation's progress toward the target already stalling, the uncertainty surrounding Trump's tariff measures makes it likely that the Federal Reserve will remain on hold for some time. San Francisco Fed President Mary Daly confirmed this in a speech yesterday, emphasizing that the Fed needs time to assess the overall impact of Trump's policies.
Daly also reiterated that monetary policy should remain restrictive until there is clear evidence of continued progress in reducing inflation, aligning with the views of her colleagues.
Looking at the broader U.S. economic picture, strong growth, a solid labor market, and existing inflation risks---before the tariff effects even take hold---leave little justification for further rate cuts.
However, some market observers argue that the increase in January's consumer price index was driven by seasonal factors, meaning that inflationary pressures may not persist, potentially leading the Fed to consider rate cuts. A Bank of America survey found that about 77% of surveyed fund managers expect the Fed to lower interest rates this year.
Fed Governor Christopher Waller echoed similar sentiments yesterday. Waller questioned whether the consumer price index had been appropriately adjusted for seasonal factors and suggested that the Fed's preferred inflation measure presents a less concerning picture.
He estimates that the core personal consumption expenditures (PCE) price index, which excludes food and energy, increased by 0.25% in January and 2.6% year-over-year.
Ultimately, as traders continue to assess Trump's tariff moves, they will also be looking for further guidance on the Fed's policy path, with next week's PCE data release expected to provide key insights. Additionally, the Fed's January meeting minutes, set to be published later today, could offer further clues.
Will Gold Rally Continue? Traders Weigh Tariffs, Inflation, and Fed Policy
Following Trump's new tariff announcement, gold surged toward an all-time high before stabilizing.
Trump's rhetoric on tariffs is increasing uncertainty in global markets, fueling demand for safe-haven assets and driving inflows into gold. However, speculation that Trump is merely using tariffs as a negotiation tool has recently tempered these inflows.
Traders who believe that Trump will not impose aggressive tariffs and that U.S. inflation will not rise as feared—allowing the Fed to continue cutting rates this year—are shifting toward relatively riskier assets. As a result, the S&P 500 index has hit fresh record highs.
Meanwhile, Fed officials continue to emphasize that they want to see further progress on inflation before proceeding with rate cuts. In this context, upcoming data and developments that shape expectations for the Fed's policy path will be crucial for gold prices.