Punitive (25%) tariffs have been put on Mexico and Canada (although there’s a lower 10% tariff on energy in the case of Canada). The US has also doubled the tariff on China to 20% and more tariffs seem to lie ahead. Right now, estimates suggest that these tariffs could trim US growth by around half a percentage point with inflation lifted by up to a percentage point above the rate it would have otherwise been in the absence of tariffs. But such simulations are based on the assumption that the increase in tariffs is permanent and we don’t know that yet. And even if they are permanent defenders of tariffs will point out that their imposition only has a one-time effect.

In other words, tariffs lift prices only once, when the hike takes effect. This means that annual inflation will revert back to its pre-tariff trajectory after a year. But this is a contentious view as we’d argue that tariffs do produce long-lasting effects, like shifts in supply chains, that can have an ongoing impact on inflation – and growth. So, even if we accept this ‘one-time’ view, the impact is still likely to be significant; perhaps significant enough to provoke a more serious downturn in the economy, even a recession, and/or a surge in inflation that necessitates a response from the Fed.

However, what’s the effect on the economy if tariffs are raised one month and then dropped again a few weeks or months later? That could easily happen. Indeed, the market may be banking on it. Why is this? We know that the only thing that President Trump likes more than a ‘deal’ is a deal that he wins. And if he can claim that tariffs on Canada and Mexico have effectively closed the borders to fentanyl and illegal migrants he could cut tariffs again and achieve the ‘win’ that he wants without too much damage to the US economy. But is this likely? We see two reasons for doubt.

The first is that imposing tariffs and then lifting them again still creates huge uncertainty. Indeed, we may already be seeing an ‘uncertainty-led’ downturn in the economy even before tariffs were imposed. So, while Trump might ‘win’, the economy could still end up losing.

The second problem we see with a quick withdrawal of tariffs is that this strategy undermines two of the key objectives of the Trump administration. One is to generate significant revenue from tariffs and the other is to encourage manufacturing back to the US. In fact, we’d hazard a guess that an ‘on again – off again’ tariff strategy will actively dissuade firms from moving to the US and might even tempt some US firms to shift abroad. The bottom line is – as we have known all along – there are no winners from tariffs, even the US.

Financial markets seem to know this. The question is whether traders and investors actually hold the key to the ‘temporary’ or ‘permanent’ question surrounding tariffs. For instance, the Administration could find itself under significant pressure to turn any plan for permanent tariffs into a temporary one if asset prices like stocks capitulate under the weight of tariffs and the dollar plunges. But conversely, Trump might feel emboldened by his tariff strategy if current financial market strains start to ease off. So, what is it likely to be?

Steven Barrow, Head of Standard Bank G10 Strategy, said this tariff noise will indeed depress risk assets like stocks and weigh on the US dollar as well. But it will not create such extreme distress that the Administration feels compelled to withdraw the tariff increase. Of course, Trump might want to take the tariffs off anyway, once he has ‘won’, and won’t need a plunging equity market to justify a withdrawal. Could a quick-fire reversal of tariffs lift risk assets and the dollar? Steven Barrow rather doubts it. Even temporary tariffs can create a level of uncertainty and distrust that has lasting consequences; none of them good.