Trade War Fears Get Even Less Spooky

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With Supreme Court arguments over President Donald Trump’s reciprocal and blanket tariffs looming next week, all is not quiet on the trade front. In the last week, we had a rare earths deal, a fresh tiff with Canada, new deals in Southeast Asia and a deal to make another deal with China. While the court’s upholding lower court rulings and upending tariffs based on the International Emergency Economic Powers Act could call some deals into question, these moves do further mitigate and walk back earlier threats. Hence, the S&P 500 is back at all-time highs and rising, illustrating how stocks continue adapting and moving forward. Against that bullish backdrop, let us quickly round up the latest.

Another China Deal?

When last we checked in early this month, a seeming renewal of the administration’s trade spat with China jolted markets short term, as the expiration of this summer’s temporary deal loomed. After China toughened rare earths export restrictions, Trump publicly mulled canceling this week’s talks with Chinese President Xi Jinping and threatened to slap an additional 100% tariff on most Chinese goods. It basically re-ran the springtime trade tussle and had all the hallmarks of talking tough to get leverage in negotiations, but investors were nervous about a new trade war all the same.

Two-plus weeks later, it is increasingly clear this was indeed just another game of trade chicken. Trump downplayed the triple-digit tariff threat in the following days, indicating no one really wanted to go through it but they would if they had to. He and other administration members then struck an optimistic tone about a new deal, and over the weekend trade representative Jamieson Greer said a framework is basically done, while China’s trade rep, Le Chenggang, heralded a “preliminary consensus.”^[i]

Yes, just in time for Trump and Xi’s very-much-on meeting Thursday, it seems we have another deal to make a deal! Details are scant, but in the Sunday television rounds, Treasury Secretary Scott Bessent said he expected a one-year delay on rare earths export controls, while Greer alluded to extending the pause on higher tariff rates.^[ii] There is also talk that it could restart Chinese purchases of American soybeans, which has hammered US farmers since April’s tiff began. As a starting point for Trump and Xi’s talks, it all sounds just skippy. It doesn’t guarantee they finalize an agreement Thursday, and more speedbumps are possible, but so far this is following the standard playbook—a playbook markets know pretty well by now.

A Canadian Rerun

Things with Canada also appear to be following that standard playbook, albeit a few pages behind. Last week, Trump announced all trade talks with Canada were “terminated” due to an anti-tariff television commercial produced by Ontario’s provincial government and aired during the baseball playoffs.^[iii]

Now, it is pretty standard that when a local sports team competes in a nationally televised event, its state or city will splurge on some ad time to promote tourism, job opportunities, investment or trade. So with the Toronto Blue Jays battling the Seattle Mariners for the American League pennant last week, Ontario placed an ad explaining tariffs’ deleterious impact on the imposing nation … using audio from former President Ronald Reagan to make the case. But the Ronald Reagan Presidential Foundation & Institute alleged the clips were used without permission, taken out of context and spooled out of order, and Trump cited their criticism when blasting the ad and scrapping the talks.

Things seemed to simmer down when Ontario Premier Doug Ford talked things over with Canadian Prime Minister Mark Carney and agreed to pull the ad, effective Monday. But that still left the door open for it to run in Games 1 and 2 of the World Series between the Blue Jays and Los Angeles Dodgers, which it did. That prompted Trump to announce an additional 10% tariff on all eligible Canadian goods. As yet, there is no Executive Action confirming that social media announcement, but Trump reiterated he has no plans to resume talks with Carney.

Precedent implies this will all blow over. The China framework is one example. So is the spat with Canada earlier this year, when Trump threatened to end negotiations over Canada’s digital services tax. That all worked out fine as Canada scrapped the tax and talks moved forward. Presuming the ad doesn’t air during Game 3 tonight, we can see this simmering down quickly.^[iv]

But if it doesn’t, and if that extra 10% tariff becomes real, we doubt it means much. The tariffs apply only to goods not covered under the US-Mexico-Canada Agreement (USMCA), which means the vast majority of trade won’t be affected. About 86% of imports from Canada are duty-free, thanks to USMCA, rendering the extra tariff largely symbolic.^[v] Now, USMCA is up for renegotiation next year, but that is a separate issue, and even if the parties decide not to extend the deal then, it would stay in place another 10 years—a very big window for this or future administrations to resurrect it.

Deals and Potential Deals in Southeast Asia

While dealmaking had been quiet in recent months, it is back with gusto now. This weekend, the administration announced deals with Malaysia and Cambodia and deals to make deals with Thailand and Vietnam.

The Malaysia and Cambodia deals look pretty standard. Like past deals elsewhere, they include pledges to buy aircraft from the US half of everyone’s favorite aerospace duopoly. Malaysia and Cambodia will also cut tariffs on a range of goods (including agriculture, metals and manufacturer products) and stop using local regulations (e.g., agricultural standards) to block imports. And they agreed to give the US access to critical minerals, pledged not to target big US Tech firms with taxes or regulations and promised to crack down on transshipping. And in exchange, the administration will leave tariffs at 19% but broaden exemptions. 

Thailand and Vietnam got looser frameworks, agreeing to cut tariffs and regulations and buy airplanes, with Thailand also pledging to export critical minerals to the US. Their reward is the US keeping headline tariff rates intact (20% for Vietnam, 19% for Thailand) but agreeing to widen exemptions.

That is all well and good, but nothing here addresses the elephant in the room: What qualifies as “transshipping.” While Malaysia and Cambodia pledged to crack down on it, in theory, it will all depend on how the US redefines “country of origin,” which is easier to type than it is actually to determine. Will a made-in-Vietnam good with some Chinese components or intellectual property count as “Chinese”? What about a good made in Thailand by a Chinese-owned factory employing local workers? Is the divide based on value or volume of components? The answer is presently unknown and could render these deals largely meaningless. So while deals are nice, we don’t think these do much to clear uncertainty.

Rare Earths Aren’t Rare

While the administration is optimistic China will pause its rare earths export controls, plan b appears to be in full swing: Developing a robust rare earths infrastructure outside China.

You see, rare earths have never been rare. They are abundant! But extracting them requires separating them from the other minerals they stick to, and most of the infrastructure for separating and refining them is in China. That gives China leverage over global supply over these “critical minerals” used in most electronics, which gives the rest of the world new incentive to develop their rare earths mining, separating and processing capacity.

Which is what they are doing! In addition to securing critical minerals access via the aforementioned Southeast Asia deals, the Trump administration also inked a rare earths deal with Australia last week. Both sides pledged to invest in domestic rare earths mining and processing, basically working together to boost global capacity. Unlike the administration’s earlier rare earths investments, it doesn’t appear to involve the US government having an equity stake in the Australian companies.

It did contain a “price floor” though. That could help promote development in the sense a fledgling rare-earths mining industry could struggle to compete with an established one when the metals’ prices are low. This interference with market prices, though, could also bring misdirected investment into an industry with a questionable profit outlook. It is also very widely known and therefore reflected in stock prices already, not some massively bullish driver for Materials stocks looking forward. But it should help ease sentiment over rare earths, which have been a touchy subject with investors for over 15 years.