If the performance of the US government in the past 72 hours is indicative of future results, then the world will remain a chaotic place under Donald Trump. Before the Trumpian knot is untied (and Gordius would tip his hat to the seemingly disorderly nature of US policy making) it is useful to summarize the circumstances under which the US administration conducts its political and economic agenda.

There is little doubt that the US trade deficit is high. It is estimated to have been $478 billion globally in 2013 and rose to $773 billion by 2023, according to the annual data. It fell by $198 billion from 2022 to 2023 but was still higher than at the end of the first Trump administration (although it also increased between 2016 and 2020). As for three of the most salient trading partners, the trade balance improved from 2022 to 2023 with Canada and China but worsened with Mexico. The deficit became wider with Canada and Mexico during Joe Biden’s reign (until 2023, that is) but narrowed with China. As a percentage, between 2020 and 2023 Canada’s share of the total US trading deficit rose from 2% to 5%, Mexico’s from 18% to 21% and China’s plunged from 50% to 36%.

As for oil, China’s role is almost insignificant, at least on the import side. The US hardly buys Chinese oil. The latest EIA monthly data, from November last year, shows that US product imports from China stood at a negligible 3,000 bpd. Oil export to China is more noteworthy. It stood at 869,000 bpd three months ago; 195,000 bpd of crude oil and 674,000 bpd of products, which is 8% of the total. The US imported 4 mbpd of Canadian and 450,000 bpd of Mexican crude oil. On the product front, the volumes were 625,000 bpd and 167,000 bpd. When all of these are added up, one will find that Canadian and Mexican imports were 64% of the total. On the export side, the most consequential part is the product volume sent to Mexico. It reached 1.3 mbpd in November. Collectively, Canada and Mexico had 20% of the US crude oil and product export market. The US register deficits in global trade and receives more oil from Canada than it sends there but shows a surplus of 3.4 mbpd in international oil trade, including 651,000 bpd with Mexico.

There was a huge amount of uncertainty about the implementations of policies of the second Trump administration. The fears proved to be justified. Just hours before the tariffs on Mexico and Canada were due to take effect agreements were struck with both nations to delay the implementation by 30 days. Concessions were made by the two countries on immigration and on drug trade. The suspension, on one hand, shows the effectiveness of the US coercive tactics, which undeniably resulted in its neighbours being shaken out of inertia and complacency on the above-mentioned issues. On the other hand, trade deficit and protection for domestic manufacturing will remain thorny issues and yesterday’s victory could prove to be pyrrhic. Re-implementing punitive measures remains a very clear and present danger.

Investors were forced to make a handbrake turn and the rally in the oil market and the sell-off in equities reversed. Oil still finished the day somewhat higher but the sell-off continues this morning and all of yesterday’s gains have been reversed. Equities are once again undecided as China has announced retaliatory tariffs on some US goods.
Notwithstanding the initial oil price rally triggered by the danger of varying excise taxes on Canadian and Mexican oil exports into the US, OPEC decided to stick to its guns and keep the output quotas in place until the end of 2026 and gradually unwind the 2.2 mbpd of voluntary constraints from April, this year. Don’t hold your breath until Donald Trump is content with the OPEC+ strategy but should the export tariffs on Canadian and Mexican oil be re-introduced further down the line and prices strengthen again, the tapering might just take place. In case of a price drop and another delay in easing output restrictions, Mr Trump’s patience will be severely tested.

Then, there is the question of how long the possibility of tariffs will linger. In their current form, however coercive, they are flexible. They can be withdrawn and re-implemented swiftly as demonstrated yesterday. Assuming that they will be re-introduced on Canada and Mexico and remain in effect against China it is worth examining under what conditions they might be withdrawn permanently:

-          Because of international and domestic outrage, co-ordinated retaliatory steps, falling equities and pressure from moderate Republicans the president backtracks.
-          Tariffs are lifted, because trading partners will be deemed to comply with US demands and promise to buy more US goods and reduce trade deficit in addition to limiting immigration or cracking down on drug trade. 
-          Given the diverse business interests of Donald Trump’s inner circle, which would be adversely affected by the potentially discriminatory measures, the President decides to lift tariffs.
-    US courts or the Congress find the measures, which are enacted using the International Emergency Economic Powers Act, illegal and block them.

Predicting with great confidence how the latest round of trade wars plays out is simply impossible. What seems almost given is that the reputational damage to the US the latest move precipitated will take a long time to repair. Judging by yesterday’s events it is fair to conclude that tariffs could lead to political and economic patriotism and even nationalism. Whether it played part in yesterday’s temporary suspension and helped reach concessions is open for debate. Yet, US isolation remains a very probable legacy of the second Trump presidency.
 

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