Wait, So All These 'Tariff Dramas' Are Actually Just Some Trump's Deja Vu From 8 Years Ago?

Trump is set to impose reciprocal tariffs on its trading partners starting April 2. According to his description, the U.S. will raise tariffs to appropriately high levels to match the tariff and non-tariff barriers faced by American exporters in international markets. This may sound straightforward, but in reality, it is a recipe for potential conflict and retaliation. While the much-hyped tariff announcement could send U.S. stock markets in any direction this week, the subsequent countermeasures and negotiations may trigger multiple rounds of volatility that could persist for years to come.

Ask Aime: What are the potential impacts of Trump's tariffs on the U.S. stock market and global trade?

The"NAFTA Negotiation" From 8 Years Ago

The trade negotiations between the U.S., Mexico, and Canada may serve as a precedent for what markets can expect. Eight years ago, Trump won his first presidential election partly by promising to tear up or renegotiate the North American Free Trade Agreement (NAFTA), which had supported trade across the continent since 1994.

Similar to today's reciprocal tariffs, market unease over NAFTA peaked at some point between Election Day and early 2017. By August 2017, when the parties finally sat down to formally renegotiate NAFTA, the warm and fuzzy opening remarks from the three delegations led many market participants to believe they could stop worrying about North American trade. However, the negotiations were far from straightforward, even though they involved only three political players.

In 2018, just as NAFTA negotiations seemed to be making substantive progress, Trump unexpectedly decided to impose tariffs on steel and aluminum imports from Mexico and Canada, reversing an earlier decision to exempt the two neighbors. Tensions escalated further when the Trump administration announced a so-called Section 232 investigation into auto imports—a potential precursor to tariffs on Mexico's auto industry. Then, in June 2018, Trump lashed out at then-Canadian Prime Minister Justin Trudeau on Twitter, further straining the already tense negotiations.

The second year of NAFTA negotiations coincided with heightened volatility in U.S. markets. While tax reform had buoyed investor sentiment in 2017, the renewed NAFTA drama in 2018 clashed with other tariffs Trump imposed on China and other countries. The S&P 500 experienced a correction in February 2018, then traded sideways for months before teetering on the edge of a bear market by December. By the end of 2018, the CBOE Volatility Index (VIX), a measure of implied volatility often referred to as the fear gauge, had spiked.

Ultimately, the U.S.-Mexico-Canada Agreement (USMCA) was reached and, after a tortuous ratification process by three legislatures, took effect in 2020. Now, Trump is effectively reigniting a trade war with both countries, proving that no agreement is ever truly safe.

The Current Situation Is Far More Complex

Markets now face a much greater challenge: the number of adversaries in Trump's trade war has multiplied. In an interview, Kevin Hassett, director of the White House National Economic Council, mentioned 10 to 15 target countries that account for a trillion-dollar trade deficit, with both non-tariff barriers and high tariffs.

If the real goal of the April 2 announcement is to kick off negotiations, these talks will almost certainly begin from a place of fundamental disagreement. The definition of reciprocity in trade means completely different things to different people. In some cases, the U.S. could discuss bilateral deals with its counterparts, but Trump and his deputies have also suggested that their reciprocal tariff proposal might account for value-added taxes (VAT) and various other non-tariff barriers, including food safety standards that make it harder for U.S. producers to sell overseas. In many cases, these are policies enacted by sovereign legislatures, not bargaining chips in a Trump-style deal.

Similarly, VAT is a cornerstone of government revenue models. In Europe, Trump's stated goal of pressuring countries to increase defense spending is entirely at odds with demanding they abandon a basic revenue source. For most European governments, lowering VAT would be fiscally reckless (and they shouldn't because VAT is fully compatible with fair international trade). If the U.S. wants to take the untenable position that VAT creates an unfair playing field, it should establish its own VAT.

Negotiating any of these issues involves countless layers of complexity: foreign interest groups, foreign legislatures, foreign election cycles—not to mention a shaky U.S. economy and the looming 2026 midterm elections.

What's the Impact?

Goldman Sachs economists estimate that a semi-direct adjustment for global tariff disparities could raise the overall import-weighted tariff rate by about 1 to 2 percentage points. All things considered, this is an outcome market and the global economy could learn to live with it at this stage.

But anything beyond that would plunge markets into a potentially fierce and protracted cycle of conflict and negotiation. Goldman's best guess is that non-tariff barriers could add another 6 percentage points to actual tariffs. VAT could add another 15 percentage points, while exchange-rate-related factors might tack on an additional 15 percentage points.

Trump briefly eased market tensions last Wednesday by calling his upcoming reciprocal tariffs very light and saying his administration was trying to be somewhat conservative. But given Trump's track record, policies could easily shift again.

Goldman's baseline tariff scenario estimates that Trump's entire agenda would result in a cumulative 15-percentage-point increase in tariffs, including those already announced. If the reciprocal tariffs are truly meant to kick off negotiations around the world, markets should brace for prolonged uncertainty with each round of talks.