UBS On-Air: Paul Donovan Daily Audio 'What tariff retreats teach us'
The recent retreat by U.S. President Trump from the proposed elimination of de minimis tariff exemptions signals significant market implications for U.S. consumers and trade dynamics. Per the full note from UBS, this temporary halt maintains the threshold of USD 800 for tariff-free imports, directly affecting consumer goods prices and highlighting the domestic cost of tariffs. The visibility of these tariffs—as experienced by consumers in everyday purchases—suggests that any further attempts to implement new tariffs could meet substantial political resistance amidst rising inflation concerns. This context positions potential currency reactions as traders monitor consumer sentiment and inflation indicators closely.
What the desk is arguing
The desk believes that the recent decision to maintain de minimis tariff exemptions could provide temporary relief to consumers and may have implications for the U.S. dollar's strength. Per the full note from UBS, aggressive tariffs on goods priced below this exemption would largely burden U.S. consumers, which could catalyze political backlash.
This context is key as the Administration’s retreat reflects growing concern about inflation's visibility affecting voters' purchasing power. The outcome signals that highly noticeable tariffs may provoke swift political action, potentially impacting future fiscal policies related to trade.
Where it sits in our coverage
Our consensus target for USD/EUR is currently set at 1.075, with a range between 1.04 and 1.12. Specific forecasts across firms exhibit differing views; for example, jpmorgan targets 1.10 for March 26, while bofa holds a more bearish stance at 1.04 for the same tenor.
This analysis aligns with the general market sentiment that anticipates moderating tariffs could maintain or even strengthen the dollar's position in the medium term, given consumers' sensitivity to pricing changes.
How other firms see it
Firms like jpmorgan and citi appear to align with the desk's view on the potential support for USD due to the nuanced political landscape regarding tariffs. In contrast, bofa suggests that consumer impacts may be more significant, advocating for a cautious approach toward long positions.
As discussions continue around trade policy, watch USD/JPY for any spillover effects from these tariff insights alongside the implications of upcoming U.S. inflation reports.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01President Trump's tariff exemption retreat highlights consumer sensitivity to trade policy.
- 02Tariffs affect the everyday costs for consumers, impacting inflation perceptions.
- 03Political ramifications from cost increases could delay future tariff implementations.
- 04The dollar's strength could be intertwined with consumer sentiment around inflation.
Market implications
Traders should monitor the USD/EUR exchange rate closely for potential volatility around the 1.075 level, especially as consumer inflation readings are expected to shape market sentiment in the near term.
Risks to this view
A sudden spike in inflation rates or a shift in consumer sentiment against tariff policies could lead to increased volatility and a potential reversal of the dollar's recent strength, especially if it impacts broader political support.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Monday the 10th of February. US President Trump has made their fourth retreat from a threatened tariff and this retreat seems to be confirming something of a pattern.
The de minimis rule for trade has been reinstated, in theory temporarily, which means that US consumers buying imports worth less than $800 will not now be subject to a trade tax. What is this to do with the earlier retreats from taxing consumers of goods from Colombia, Mexico and Canada? The answer would seem to be visibility.
Taxing imports from those countries would have been very visible very quickly to US consumers. Higher coffee prices, a more expensive avocado on toast or dramatic inflation in propane is all very visible to ordinary consumers. Ending the de minimis tariff will also be extremely visible.
Temu, which exports individual items from China, was the most popular app downloaded in the United States last year and has over 180 million users accessing the app each month. Not de minimis, those users would see the price increase a trade tax entails with every single order they make and it would be very obvious to them that US consumers and not foreign companies are who has to hand over the additional cash to the US Treasury when a tariff is imposed. In other words, if the trade tax is visible to US consumers, Trump will retreat quickly.
The proposed steel and aluminium trade taxes are not so visible to end consumers and so the risk is that these will endure. Because China's exports to the United States tend to fall in price over time, taxing bulk exports means less deflation rather than necessarily producing outright inflation and that is less obvious to US consumers therefore. The direct economic damage from such taxes is the same.
Raising taxes reduces spending power and it will be a drag on growth. However, the second round effects are minimised. The consumer ends up paying more for a car that is made with taxed foreign steel or less efficiently produced domestic steel but the steel price part of the car is too small to be immediately obvious.
US consumers become less competitive as their costs rise but the negative employment consequences of that will take time to come through. These sort of trade taxes are likely to be more enduring therefore. Trump's willingness to disregard trade treaties also means negotiating a compromise is going to be more difficult.
Trading partners do not have much of an incentive to do a deal if they think the deal will not be honoured. We will be hearing from ECB President Lagarde today, speaking on the ECB's annual report at the European Parliament. Does this matter to markets?
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