Trump’s tariff gamble: policy prospects and market reactions

Since taking office, US President Donald Trump has signalled his intent to reintroduce tariffs on steel and aluminium to a flat 25% rate. Set to take effect on March 4th, these tariffs will override exceptions granted under the Biden administration. Despite delays and scepticism, Trump’s rhetoric alone has fuelled volatility in commodities and energy markets.

Trump's tariff strategy operates on two levels. The first targets Canada and Mexico, leveraging tariffs as a bargaining tool for non-trade issues such as immigration and drug enforcement – key priorities for his administration. This explains why he temporarily paused the tariff threat after Canada implemented new border control measures.

The second category reflects a broader trade confrontation with China, echoing policies from Trump’s first term.  While tariffs on Canada and Mexico may never materialise, they have had a greater impact on market volatility than the more predictable versions aimed at China. Market responses – particularly in metals and oil – highlight the power of tariff threats, even in the absence of implementation.

The U.S. is heavily reliant on imports of key metals, most notably aluminium, steel, and copper. The proposed 25% tariff is intended to boost domestic production, enhance national security, and reduce the trade deficit. However, achieving self-sufficiency in aluminium alone would require six times the energy used by all US data centres and could take up to five years. Given the uncertainty of future administrations continuing this policy, and the likelihood of passing higher costs onto consumers, tariffs on Canadian aluminium remain unlikely. A similar effort to boost domestic steel production during Trump’s first term yielded minimal results.

Even with a low likelihood of enforcement, the mere threat of tariffs has unsettled commodities markets. Traders on COMEX locked in pre-tariff prices, with scepticism gradually stabilising the market. By contrast, the LME, which operates on physical deliveries, has seen sustained disruption. Fears of wider tariff implications have triggered pre-emptive purchases, affecting even non-target metals such as copper, which has greater inflationary potential than aluminium or steel.

On the other hand, gold has been an exception. A tariff on gold would function as an investment tax, contradicting Trump's pro-market stance and alienating key allies. However, gold and copper imports into the US have surged due to inflationary pressures, raising transport and insurance costs.

Unlike metals, oil and gas are fungible commodities with substitutable supply sources. The impact of tariff threats has been limited to basis differentials and price spreads, with no significant effect on overall prices. There is widespread scepticism regarding energy tariffs on Canada, given that oil is imported through pipelines and lacks viable substitutes.

Refineries in the Midwest depend on Canadian heavy crudes, making any reduction in imports detrimental to both economies. Despite this, market volatility has increased, showing that policy signals alone can provoke reactions.

While tariffs remain a key part of Trump’s economic strategy, sanctions pose a greater risk of market disruption. Unlike tariffs, sanctions require congressional backing, as seen with the Countering America's Adversaries Through Sanction Act (CAATSA), introduced during Trump’s first term. Furthermore, sanctions often have unintended consequences. For instance, when restrictions on RUSAL removed aluminium from global supply, US beverage producers and European car makers faced a 25% price surge, harming productivity. Given these risks, Trump is unlikely to escalate sanctions further.

Instead, efforts to negotiate a ceasefire in Ukraine could present an opportunity to ease some of the energy sanctions imposed on Russia in 2022. Trump may seek to take credit for lower global energy prices by lifting certain restrictions, but his go-it-alone approach – excluding the EU from negotiations – limits this possibility.  With Nordstream pipelines out of service and no renewed transit agreement for Russian gas into the EU via Ukraine, US-Russia talks are unlikely to influence global energy prices significantly. A more realistic scenario is Trump leveraging EU energy security concerns to boost US natural gas exports.

Three years into the Ukraine war, Russian energy exports have shifted to China, India, and Turkey. International banks, bound by secondary sanctions, avoid Russian-linked goods, allowing regional banks outside the sanctions network to fill the gap. Historically, commodities have been traded in US dollars, making them difficult to reroute. However, Russia’s exclusion from SWIFT accelerated a global shift, with non-Western economies increasing gold reserves and settling trades outside the dollar system.

That said, the dollar remains the dominant currency for commodity trade, but if Trump escalates sanctions, he risks pushing even more trade flows outside the Western banking system, strengthening the trend of de-dollarisation. To counter this, he is more likely to reverse some of Biden’s sanctions rather than impose new ones.

While Trump’s tariff threats have unsettled markets, they are unlikely to materialise against key partners like Canada and Mexico. Tariffs aimed at China align with existing trade hostilities, making them more predictable. Meanwhile, oil markets remain insulated due to structural supply constraints and the real economic risks of sanctions. With the dollar’s role in global trade under increasing scrutiny, Trump may prioritise easing restrictions over escalating them to maintain US financial dominance.