Trade War Fears Remain Unsubstantiated

Editors’ note: MarketMinder is politically agnostic. We prefer no politician nor any party and assess developments for their potential economic and market implications only.

After Liberation Day, we saw three ways for reality to beat expectations on trade: 1) tariffs prove illegal and unenforceable, 2) tariffs drive a flurry of dealmaking and 3) non-US trade expands in response to US protectionism. Since then, all have played out to various degrees, with the latter two surging lately. Trade deals signed thus far in January underscore how reality keeps turning out better than feared.

Yes, yes, we know. Greenland chatter is spurring another bevy of threats, while the US’s deal with the UK has inched backward and the EU is slow walking approval of its US deal amid said threats. But it is worth revisiting the state of play entering the year in terms of what has actually happened, especially in light of how far reality outshined expectations tied to tariffs last year.

EU-Mercosur

After more than 25 years of negotiations, the EU and Mercosur (the South American trade bloc) signed the EU-Mercosur Partnership Agreement (EMPA) in early January. Billed as one of the world’s largest free trade zones, it will encompass over 700 million people and around a quarter of global GDP. Though smaller than the Asia-Pacific Regional Comprehensive Economic Partnership (RCEP), covering 15 countries and about 30% of global GDP, it is closer to an actual free-trade deal. The RCEP did little to reduce tariffs and other trade barriers and was more about aligning regulation—largely to Chinese requirements.

By contrast, the EU-Mercosur deal—if ratified—would remove more than 90% of duties on each other’s imports over the next decade-plus, including on cars, machinery, pharmaceuticals, raw materials and agricultural products. Besides goods, the deal also facilitates trade in services, streamlining legal and regulatory requirements, cross-border travel and digital commerce.

Now, the EMPA won’t be fully enacted anytime soon. It requires approval from EU and Mercosur members’ parliaments, which could take years and speedbumps are already emerging, as the European Parliament voted on Wednesday to send the deal to the European Court of Justice for further legal review. But reports indicate it could still proceed provisionally as soon as March. And following several free-trade agreements signed last year, the continuation into 2026 shows large swaths of the world rejecting protectionism in favor of free-flowing, rules-based trade.

US-Taiwan

Joining the flurry, Taiwan inked a deal last Thursday to lower US tariffs in exchange for investment commitments, following the blueprint Japan and South Korea used with the Trump administration. The US tariff drops from 20% to 15% and, crucially, won’t stack on top of existing duties. That means sector-specific US tariffs—e.g., on auto parts, timber, lumber and wood products—are capped at 15%.

Note, though, that Taiwan’s main export—semiconductors—remains exempt. The new agreement just helps codify this with Taiwanese companies agreeing to invest $250 billion in America’s semiconductor supply chain (note: $100 billion of this was already committed last year) and another $250 billion in credit guarantees. As long as those companies are building in America, they can import 2.5 times their current capacity duty free. When they finish construction, the terms lower that threshold to 1.5 times. Generic drugs and raw materials unavailable in the US are also exempt.

Because most US imports of Taiwanese products were already exempt from tariffs, the new deal isn’t a big near-term economic driver. Nor will the investment commitments have much immediate effect on US growth given it takes several years to build computer chip foundries, while markets focus most on the next 3 – 30 months. And, like most of these deals, it isn’t legally binding, with a lot of vagaries in the text. But from a sentiment standpoint, it reduces trade uncertainty—one less thing for stocks to deal with, which is no small thing after a tumultuous year.

Canada-China

Then the next day, Canada announced it will cut its 100% tariffs on Chinese electric vehicles (EVs) to 6.1% and that China agreed to reduce its tariffs on Canadian canola seed from 84% to 15%, starting March 1. Canada’s lower EV tariff will apply only to a 49,000 annual quota, less than 3% of the new car market. That could rise to 70,000 within five years, but even that isn’t very large. China will also remove tariffs on canola meal, lobsters, crabs and peas, while Canada will extend and expand its tariff-remission program for Chinese steel and aluminum products in short supply there.

While limited in scope, the Canada-China deal leaves room for negotiation to further boost trade, investment and commerce between the countries. Potential avenues of progress include Chinese joint-venture investments in Canada’s auto and battery sectors and visa-free access for Canadians traveling to China. This is as Canada aims to boost exports to China 50% by 2030—part of its larger goal of doubling non-US trade in 10 years to better insulate the Canadian economy from American tariffs.

Obviously, trade progress isn’t a one-way street, with tariff threats on other fronts getting abundant ink. But in time, markets are likely to weigh how the totality of the global trade landscape goes relative to expectations. These latest deals and other recent (e.g., Kenya-China) and pending (like EU-India) ones show the potential for an ok trade reality to persist and clear uncertainty against a background of developing dread.