Trump’s Tariffs and Liberation Day: How Geopolitics Can Explain the Trade Wars (and Other Sundry Items)

Coming as little shock to anyone, one of the more challenging aspects of the first couple months of the new US Administration has been the country’s trade policy. To be sure, the topic has been addressed well in the press, so there’s little reason to rehash what most of us already know. Yet it’s significant to begin this part of the client note talking about the effects of the tariffs on some of the players involved in the talks and those in cross borders business that are attempting to adapt to the uncertainty.

All of this began earlier this year with the Administration threatening to impose tariffs on Canada and Mexico. Based on what the White House called ‘an extraordinary threat posed by illegal aliens and drugs, including deadly fentanyl,’ and which ‘constitute[d] a national emergency,’ the argument was a little specious, particularly as it applied to Canada. The country’s foreign minister argued that the US was in fact a net exporter into Canada of illegal drugs and workers. Both Canada and Mexico later made efforts to address the original reasons for the tariffs.

Nonetheless, in March, the US imposed a separate 25% tariff on all imports from Canada, with a lower 10% tariff on energy and some exemptions for goods covered by the 2020 US–Mexico-Canada trade agreement. More recently, the US enacted a new round of ‘permanent’ 25% tariff on all imported vehicles and auto parts – a sector that is key to the Canadian economy and to Ontario’s in particular.

Canada, arguably, will be the hardest hit by the new trade regime given the interconnectedness of its economy with the US. It also seems to be one of the few countries to push back against Washington’s plans. Along with imposing a ban on some US imports (alcohol), there were public campaigns to ‘buy’ Canadian, and one province (Ontario) threatened to impose a 25% surcharge on the electricity that Canada supplies to some US states, affecting up to 1.5 million American homes.

Canada’s also responded to the tariffs by looking to reduce some interprovincial trade barriers currently in place, and to develop alternative trading relationships to the US. While there was a brief discussion about Canada joining the EU, Ottawa is in advanced talks with the bloc to join its defense industry in order to bring manufacturing contracts to Canada, thus lessening its dependence on the neighbor to the south.

Canada also plans to implement retaliatory tariffs on US goods in early April in response to the US’ promised import taxes. But Ottawa has offered no specifics, including the timing and the scope of the retaliatory tariffs.

The overall effect of the tariffs has not been very positive. The major US indices have been trading lower since the announcement of the new restrictions, with the S&P sliding the most since 2023. Price discovery is difficult and there are concerns over dwindling liquidity in US stocks. Moreover, US consumer confidence has been falling, and President Trump’s disapproval rating is ticking upwards.

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I was in Montreal last week and I had discussions with some Canadian trade officials. Much of what they had to say was predictable (the Canadian press does a good job of covering the news) but they did express dismay at the logic of the US actions. Once the drug and illegal migrant justification was addressed through some additional border protection measures, Canadian officials told me that they often asked their US counterparts what more was wanted to keep the tariffs at bay. Evidently, the Americans were just as confused about the future direction of their country’s trade policy, suggesting that it felt like the president was really the only one who knew what might come next. Much of the uncertainty resided in President Trump’s periodic postponement of the implementation of the tariffs, which many saw as a negotiating tactic as opposed to a concrete economic measure.

I also had a very productive chat with representatives of The Finance, Credit and International Business Association (www.fcibglobal.com). Not surprisingly, the topic of tariffs occupied the entire time, with many members expressing frustration over the US’ actions. The word ‘chaos’ was used to describe the general situation as it related to the nature and scope of the new tariff regime, with several noting that buyers are looking now at extended repayment periods, inter alia.

At the time of writing, a telephone call had just finished between President Trump and Canada’s new prime minister, Mark Carney. The rhetoric from President Trump about Canada being the 51st state was noticeably absent, with Mr Trump indicating that he ‘respected’ Canada’s’ sovereignty. In separate press conference, Carney mentioned that negotiations for a new economic and security relationship between the two countries would begin following the Canadian federal election on April 28th.

Speaking of Carney and the upcoming Canadian vote, in a remarkable turn of fortune, the Liberal Party under the new first minister now has a lead over the opposition Conservatives, which was not the case during the final two years of the Trudeau regime. The election of President Trump and the subsequent tariffs have galvanized Canadians, with Carney and his party being seen as the best suited to steer the country through the challenges that lie ahead. PRS is looking for a Liberal victory in April, but whether it can produce a majority is too early to tell.

Carney has an impressive resume: holding a PhD in economics from Oxford, the new prime minister spent time with Goldman Sachs and later headed both the central banks of Canada and the UK. After leaving the banking world, Carney served on various governing boards, including that of Bloomberg, and was the climate change envoy for Canada at the United Nations.

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PRS’ involvement in the literature on the empirical relationship between political risk and trade is well known and rather deep. Some studies have used our data in panel regression analyses to consider the effect of country risk on the trade patterns of energy importers and exporters, with the findings highlighting the importance of economic risk and – especially for exporters – that political and economic risk has a negative impact on their total trade volume and their resource control ability. (https://www.sciencedirect.com/science/article/abs/pii/S0360544221002280)

A related study using our ICRG data conducted a time-varying stochastic frontier gravity model to explore the interactions between country risk and foreign trade for the Belt and Road countries. By using the data of bilateral trades between 134 countries and China during 2003–2018, empirical results show that reduction of country risk will increase the bilateral trades between China and these countries. Based on these findings, the implementation of the Belt and Road initiative may effectively hedge the country risk of the trade partners and promotes their bilateral trades with China. (https://www.tandfonline.com/doi/full/10.1080/13504851.2020.1854433)

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New and existing clients should note that our popular Researchers’ Dataset (RDS) series – containing updates from 2024 – is now available! The RDS series – derived from our ICRG data – continues to yield unique insights into a range of topics that explore the empirical connection between geopolitical risk and such subjects as asset behavior and prices, inflation and monetary policy, the economic costs of war, forms of internal conflict, and contract repudiation, to name a few. Contact us at custserv@prsgroup.com to acquire about acquisition of the RDS updates or a multi-year series.

Our various AI platforms continue to be built out as we prepare ourselves for several gatherings affecting this explosive field in Montreal in April. PRS will be showcasing some of our models to select parties in a private atmosphere. Some of our models would have straightforward approaches, allowing the university sector to make forthright queries, to more sophisticated efforts designed for institutional investors and corporate planners to further extrapolate the data’s connection with the behavior of various financial assets. The independent back testing in the published literature that has occurred consistently over the past 30 years, along with our internal modelling, supports these efforts.

The new layout of the new PRS site (www.prsgroup.com) is finished, so feel free to have a look when time permits. The site maintains the basic character of our existing one but adopts a more modern approach – given the emphasis on the importance of our geopolitical risk data – all the while respecting such periods of innovation and new thinking as the Renaissance and the French Enlightenment. In the text, there is a nod to Voltaire, and ‘Gigi’ – our gargoyle mascot – maintains his predominant presence as he represents the power to ward off evil spirits and protect buildings they occupy and those inside!

In March I made a presentation to a gathering of World Bank personnel, detailing the ICRG and PRS data, in relation to the Bank’s World Governance Indicators (WGI). The atmosphere was very inviting, and the audience – who had some very interesting questions – were very informed and receptive. We look forward to working more with the Bank as they build out their own country investment and risk models.

Our new video series is currently in production. Named ‘Au Courant’ after a previous publication of PRS’ that enjoyed considerable success, the new bi-weekly series will include synopses of timely geopolitical risk events and what they mean for investors and business; trends in the ICRG data and country forecasts; recent academic findings using the PRS data; and the occasional interview with academics and practitioners in the field.

PRS has now surpassed the 7.5 million data point mark in relation to our curated geopolitical risk series! No other risk firm can offer such depth; nor can they claim the mantle of being consistently used in leading academic scholarship and appearing in the top journals, which, according to JSTOR, now occupies just under 1,000 published articles and book chapters.

February and March were terrific months for new and returning clients, ranging from some of the world’s top universities to the largest institutional investors throughout the US, Europe, the UK, and the Middle East and Asia. We would like to welcome several large investment firms from Canada and Malaysia, who will be using the ICRG data as a key input into their sovereign risk models.

Our ICRG political risk scoring changes have been robust over the past two months, averaging around 90 countries (out of 141) and 120 individual risk metrics.

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As always, ICRG and related PRS data continue to be the gold standard of all geopolitical risk data among the scholarly and research communities. For example, a very interesting and recently published IMF Working Paper analyzed the interaction of fiscal policy with banking sector leverage and foreign investor holdings for government debt.

The findings? A one percentage point increase in expected primary deficits results in a persistent increase in 10-year domestic bond yield by around 36 basis points over 2.5 years, with larger effects observed during the COVID-19 pandemic.

This contrasts with external bond spreads which are more sensitive to external and global risk factors. The greater the reliance on domestic banks for deficit financing, the stronger the impact of loose fiscal policy on domestic bond yields. (https://lnkd.in/gQ7Bs4gV)

Additionally, in a now classic study published by the National Bureau of Economic Research, the following question was asked: Do corrupt governments receive more foreign aid than less corrupt ones? One of the conclusions is that ‘according to most measures, corrupt governments actually receive more foreign aid rather than less’ assistance! (https://lnkd.in/eVPuNsHR)

Finally, using our ICRG data, a fantastic new study on internal conflict and the military’s involvement in politics – and published by Wiley – found that (inter alia),cross-border conflicts and foreign pressures effects on the military’s involvement in politics are conditional, becoming significant only during periods of political change.
(https://lnkd.in/eyxhNa2M)