Has the Trade War 2.0 just started?

While on Monday the markets were counting on some kind of "grown-up tariff war" - after nominating a market-friendly hedge fund manager Scott Bessent as Treasury Secretary, a day later the markets may be disappointed with the statements of the president-elect.

D. Trump:

“On January 20th, as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% Tariff on ALL products coming into the United States, and its ridiculous Open Borders. This Tariff will remain in effect until such time as Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country!”

And on China:

“I have had many talks with China about the massive amounts of drugs, in particular Fentanyl, being sent into the United States – But to no avail. (…) Until such time as they stop, we will be charging China an additional 10% Tariff, above any additional Tariffs”.

We've been through this before... On May 30, 2019, Trump announced a 5% tariff on all Mexican imports - if Mexico didn’t stop the flow of illegal immigrants into the US. See Figure 1. But he called off those tariffs a few days later... after signing an agreement with Mexico to prevent illegal immigration...

Interestingly, Trump announced new tariffs on Mexico … on the same day (i.e. May 30, 2019) that the Trump administration took a formal step to kickstart an approval process of the United States Mexico Canada Agreement (USMCA) sending a formal letter to Congress!

Figure 2 presents the same stock indices but just showing the percentage change... during the entire trade war 1.0.

All in all, the trade war 2.0 has a good chance of happening in 2025. For example, DB assumes in its base case for 2025:

„On trade, we assume a 10 percentage point increase in the tariff rate on imports from China in H1 (ratcheting up a further 10pp in H2) and an equalisation of tariff rates on motor vehicles with Europe. The forecast also assumes a 5% universal baseline tariff, though that is more likely to be implemented late 2025/early 2026”.