Trump's first day: no tariffs, yet

Donald Trump was inaugurated without the sweeping tariff orders that markets had spent weeks bracing for. The administration issued an 'America First Trade Policy' memorandum, which orders government departments to review trade agreements, currency practices and bilateral trade deficits. Traders braced for an inflation shock got a procedure, and stocks rallied in relief.

What the memo asks for

The memorandum reads like a work plan. It tells the Commerce Department, the Treasury and the United States Trade Representative to examine the causes of America’s trade deficits, the conduct of trading partners that manipulate their currencies, China’s compliance with the first-term trade deal, and the working of the agreement with Canada and Mexico. It also asks for a study of an External Revenue Service to collect tariffs and other levies from abroad. The reports are due by early April, which sets the earliest realistic date for broad action taken through these channels.

Review first, tariffs later

Using formal reviews under the Trade Act, where it could have issued emergency decrees, is deliberate. It gives the White House a window of leverage, inviting trading partners to offer investment pledges and voluntary export limits before any tariffs are imposed. By setting deadlines for the departments to report, the administration has built a staged negotiation that keeps its options open for as long as possible.

The legal route matters because it shapes what survives in court. Tariffs imposed under Section 301 of the Trade Act of 1974, or on national security grounds under Section 232 of the Trade Expansion Act of 1962, follow an investigation and a written record. The first Trump administration used exactly that sequence: it opened its inquiries into steel imports and Chinese technology practices in 2017, and the tariffs followed in 2018. Duties built on that kind of file have withstood legal challenge, and a second term seems intent on building the same file again.

A truce, for now

Equity indices rose and benchmark yields steadied as the threat of disruption on day one faded. Experienced corporate treasurers know the review process only puts tariff risk on a timetable. It does not remove it. On the evening of the inauguration the president said he was considering 25 per cent tariffs on imports from Canada and Mexico from the start of February, which suggests that the emergency route remains open for neighbours he wants to pressure on migration and drugs.

The emergency route runs through the International Emergency Economic Powers Act of 1977, which lets a president regulate imports once he has declared a national emergency. No president has yet used it to impose general tariffs, and a challenge in the courts would test whether the power stretches that far. Its attraction is speed, since no investigation is needed, and a national emergency on the southern border was declared on the first day. That combination is what gives the February threat against Canada and Mexico its credibility.

Winners and losers of a delay

The first beneficiaries are importers and retailers, who gain time to bring forward shipments and rework their supply chains before duties land. The dollar, which had risen strongly since the election on expectations of tariffs, lost some of that premium, giving relief to emerging-market borrowers with dollar debts. The Canadian dollar and the Mexican peso are more exposed than the review timetable suggests, because the threat against them runs on a shorter clock. Domestic steelmakers and other producers hoping for protection must wait, and the uncertainty itself will weigh on capital spending by companies whose costs depend on imported parts.

China is treated differently from the neighbours. The memo asks for a review of whether Beijing has kept the purchase commitments it made in the Phase One deal of January 2020, a test it clearly failed, which gives the administration a ready-made justification for new duties under the existing Section 301 authority. Chinese exporters have spent six years adjusting to American tariffs by routing goods through third countries such as Vietnam and Mexico, and a fresh round would probably target those routes as well.

The case for taking it at face value

The strongest counterargument is that the delay reflects real caution. Tariffs on a large scale would raise prices just as inflation is proving hard to push down, and the Federal Reserve has made clear that it will not cut rates quickly while prices remain sticky. A president who campaigned on the cost of living has reason to fear an inflation spike, and a review process lets him claim toughness while negotiating. That reading may prove right for allies that offer concessions, but it sits uneasily with a campaign built on across-the-board tariffs and with the threats already made against Canada and Mexico.

Why the inflation risk has not gone

For the bond market the question is timing rather than direction. Tariffs act as a tax on imports, paid first by the importer and then passed on in part to consumers, so a broad programme would lift measured inflation for a year or more. A Fed that is already cautious would then face a choice between tolerating higher prices and keeping rates higher for longer. By pushing the decision back to the spring, the memo leaves that risk in place for markets to price later, rather than removing it.

What to watch

The indicators to follow are the February deadline for Canada and Mexico, the early-April reports from the departments, and any tariff actions against China, which the memo singles out. Company guidance in the coming results season will show how much importers are front-loading purchases. The market has mistaken a change of sequence for a change of heart. The reviews are building the legal case for targeted tariffs, and those will probably arrive later this year, with Canada, Mexico and China first in line and the inflation effect showing up in prices by the second half.