Trump Tariffs will Trigger Global Trade War, with Gold and Silver Set to Benefit

Image credit: www.npr.org

With less than two months until his inauguration on 20 January 2025, US president-elect Donald Trump is ramping up the rhetoric on tariff threats to unprecedented levels – even by his own “all guns blazing" standards.

In the space of less than two weeks, Trump has lost no time in firing off import tariff threats against China, Canada, Mexico, and all nine member countries of BRICS (a grouping which represents 45% of the world’s population). In doing so, Trump is rekindling fears of global trade wars and creating global economic uncertainty.

This global economic uncertainty coupled with the expected increase in inflation caused by probable trade wars will have serious consequences for global financial markets, but will likely be a boon for precious metals prices, given the role of gold and as universal safe-haven assets and traditional inflation hedges.

Trump’s Threatening Tariffs

In a post on his Truth Social media platform on the evening of 25 November, Trump targeted Canada and Mexico with the threat of a 25% tariff on all of their products entering the US. Trump crafted his threats using the pretext of illegal immigrants and the drug fentanyl entering the US from Mexico and China, however this is just a convenient political justification for the real motive behind tariff threats and tariffs, which is economic leverage in upcoming trade negotiations.

In a second post on Truth Social published at the exact same time on 25 November, Trump then turned his attention and threatened China with additional 10% import tariffs on all Chinese good coming into the US.  Again he tied these tariffs to the pretext of the drug fentanyl coming into the US from China, when this is just political cover for the real motive behind the tariffs, which is economic leverage on upcoming ‘Phase 2’ trade negotiations with China.

Then stunningly, on 30 November, Trump upped the ante on tariffs even more by moving beyond a focus on Canada, Mexico and a standalone China, when he again on Truth Social targeted the entire BRICS group of countries with the threat of 100% tariffs on goods imported into the US from BRICS countries, if BRICS doesn’t back down on creating a BRICS currency or ‘any other currency’ (which would include the gold-backed currency and settlement mechanism ideas which BRICS has been discussing).

The idea that the BRICS Countries are trying to move away from the Dollar while we stand by and watch is OVER. We require a commitment from these Countries that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty U.S. Dollar or, they…

— Donald J. Trump (@realDonaldTrump) November 30, 2024

As well as a significant escalation in the use of tariff threats against a larger set of countries, Trump is now playing a dangerous game in linking the threats to a BRICS currency or a gold-backed currency.

Image credit: tradebrains.in

Not only is the opening gambit of threatened tariffs (100% tariffs) extremely high, but by linking these threats to a new multilateral BRICS currency, it could accelerate a ‘showdown’ between BRICS and the West and between the US dollar and an emerging (and possibly gold-backed) dollar alternative. Again this is positive for the gold price.

The Trump Tariff Precedents

Trump and his trade negotiation team have an established track record of imposing tariffs on trade partner countries, and primarily use this strategy to gain leverage in trade negotiations so as to negotiate better trade terms for the US, i.e. the “America First" doctrine. They also relish using this negotiating style and seem to enjoy the long drawn out negotiating game. Tariffs are also used by Trump to promote protectionism for American industry and to appeal to his support base. While Trump claimed that tariffs would also reverse the US deficit, they did nothing of the sort, and the trade deficit actually rocketed higher during his first administration.

Irrespective of that, the trade strategy of the last Trump administration (between 2017-2021), was one of threatening trading partners with tariffs, and then imposing tariffs using exaggerated rationales – an action which provokes or triggers reciprocal tariff retaliations from other countries – with the Trump team then imposing further tariffs on the reacting party and provoking trade wars, all the while dragging out negotiations and playing hardball until the US receives preferential concessions and access to foreign markets, with the ultimate goal of securing bilateral or regional trade deals that offer optimal terms for the US.

Image credit: CEIC Bloomberg, MUFG GMR

Trump and the US Trade Representative (USTR) office used this approach to pressure China, which resulted in the “Phase 1” trade deal which the US and China signed on 15 January 2020, and also used this approach with Canada and Mexico during the United States-Mexico-Canada Agreement (USCMA) deal, which replaced the North American Free Trade Agreement (NAFTA). Although implemented on 1 July 2020, the USCMA was mostly negotiated over the 2017-2019 by Trump’s team. These events (as you will see below) were marked by threats of tariffs in both the China and USMCA cases, and then multiple rounds of tariffs by the US and China in the case of the US-China trade war.

Knowing the Trump tariff playbook in Trade War 1.0 over the 2017-2020 period will give important insights into how the next round of Trump tariffs are likely to play out in coming months when the new Trump administration comes in beginning 20 January 2025. Back in the first trump administration, Robert Lighthizer was Trump’s US Trade Representative. This time round from January 2025 onwards, Jamieson Greer (who was Lighthizer’s chief of staff in the USTR) will be US trade representative, so Trump is essentially bringing back together some of his old trade team. If any evidence is needed to convince people that Trump will immediately move to impose US tariffs on foreign trade partners, then Jamieson Greer’s appointment is it.

Then like now, Trump was already calling for the imposition of tariffs on Chinese goods before he entered office in January 2017, and as soon as he was in the Whitehouse he began accusing China of unfair trade practices in the areas of technology transfer, and intellectual property.

Following failed US-China trade talks in April 2017, Trump, via a Presidential Memo, directed the USTR in August 2017 to investigate China’s trade practices under Section 301 of the Trade Act. By June 2018, the USTR announced 25% tariffs on $50 billion worth of Chinese imports, with the first $34 billion taking effect on 6 July 2018, at which point the US began to collect the additional duties.

That same day, China retaliated with tariffs on $34 billion of US goods, declaring it was “forced to fight back" to safeguard national interests.

“China promised not to fire the first shot, but in order to safeguard the country’s core interests as well as that of the people, it is forced to fight back.” – China’s ministry of commerce

By August 2018, US tariffs extended to another $16 billion of Chinese goods. In September, Trump escalated the conflict with 10% tariffs on $200 billion of imports, prompting China to retaliate in kind.  imposing 10% import tariffs on $200 billion worth of US exports to China. It was then officially a trade war.

Further tit-for-tat rounds of tariffs continued throughout 2019, heightening trade tensions. Finally, in January 2020, following further US-Chinese trade talks, the “Phase One" trade deal was signed, revealing Trump’s true objective: using tariffs as leverage to extract concessions from China

It is highly likely that starting in January 2025, Trump and the US Trade Representative Office will begin pursuing a strategy against China that will mirror the one it pursued between 2017 -2021.

However, the question, which is the uncertainty, is how extensive these tariffs will be, and on which countries tariffs will be imposed in addition to the long list of countries (Canada, Mexico and BRICS) that have already been targeted.

In September 2016 in an election debate, Trump had called NAFTA the “worst trade deal ever made”. So it was not surprising that his first administration negotiated and implemented the USMCA as a renegotiated and modernised version of NAFTA.

USMCA was negotiated beginning in August 2017 and finalised in October 2018, ratified by Congress in December 2019, and came into effect on 1 July 2020. During the negotiations on USCMA, Trump and his trade team both threatened tariffs and imposed tariffs against Canada and Mexico. The actual tariffs imposed were across the board tariffs, where in March 2018, the Trump administration imposed 25% tariffs on steel imports and 10% tariffs on aluminium imports into the US. This impacted both Canada and Mexico as both are leading steel and aluminium exporters to the US (but also impacted a whole host of other countries such as Germany, Japan, South Korea and the biggest stell producer of all – China). Not surprisingly, both Canada and Mexico at the time imposed retaliatory tariffs on US exports.

Trump at that time had also threatened tariffs of up to 25% tariffs on imported cars and auto parts from Canada and Mexico. Both these actual steel and aluminium tariffs, and the threats of car and auto parts tariffs, were used as central bargaining tools in the USCMA negotiations, so as to allow the US to get concessions and favourable trade deal terms. These tariffs and threats of tariff were central to Trump’s USCMA strategy, and in October 2018 he attributed the success of the USMCA negotiations to the fact that he had imposed on and threatened Mexico and Canada with tariffs:

“Without tariffs, we wouldn’t be talking about a deal”

“Just for those babies out there that talk about tariffs – that includes Congress with its ‘Please don’t charge tariffs’ –  without tariffs, we wouldn’t be standing here.”

This time round, Trump is threatening tariffs on Canada and Mexico so as to obtain better revisions on the USCMA when it comes up for review in a year and a half. Under Article 34.7 of the USCMA, the 3 parties (the US, Canada and Mexico) are obliged to to hold a ‘joint review‘ of the agreement 6 years after it came into force on 1 July 2020. Which means the review has to happen on 1 July 2026, which is just a year and a half from now. As part of the joint review, the parties can submit revisions to the agreement, and they can also state if they want the agreement to continue after 2036 or not (as there is a built in end date 10 years after 1 July 2026 if it’s not extended).

As regards US legislation, US Code 19, Chapter 29 (USMCA) states that “at least 270 days before a joint review commences" the USTR must publish a notice about the joint review of 1 July 2026 and hold a public hearing, and “at least 180 days before the review" the USTR must report to Congress about how it views the USCMA, whether it wants to extend it, and explain any concerns it has with the agreement. This would put the public hearing at late September 2025 and the report to Congress at late December 2025 at the latest. This therefore gives the Trump administration a mere 9 months (from January – September) to actively negotiate with Canada and Mexico. So except plenty of tariff threats and actual tariffs during that time.

As 2024 comes to a close, Trump’s current rhetoric on tariff threats therefore needs to be seen in the same context as over 2017 – 2021:

• with China it’s a way to begin negotiations on an eventual new “Phase 2” bilateral trade deal which will extend ‘Phase 1’
• with Canada and Mexico it’s a way for the US to benefit from a first mover advantage in securing an early review of USCMA terms before they come up for renewal in July 2026. The USCMA can even officially be terminated and not renewed in July 2026 if any of the three member countries opts out.

America’s Largest Trading Partners

And why Trump’s initial focus on Canada, Mexico and China? Well simply put, it’s because Canada, Mexico and China are the USA’s three largest trading partners.

Based on USTR trade data, of the approximately $7 trillion of total US trade in 2022 (goods and services exports and imports), Canada was the largest trade partner of the US, representing 13% of total trade with the US. In second place was Mexico, representing 12% and in third place was China, representing 10.5% of total trade with the US.

In terms of imports (upon which US import tariffs can be applied), China was the top supplier of goods to the US (16.5% of total goods imports), followed buy Mexico and Canada. Together the US imported over $ 1.4 trillion worth of goods from these three countries.

Canada ($356.5 billion), Mexico ($324.3 billion), China ($150.4 billion) in that order were also the three largest export destinations for US exports, together representing $830 billion worth of US exports.

China is also the world’s second largest economy, with an annual GDP of US$ 18 trillion, second only to the US (which has an annual GDP of US27 trillion). China is also the world’s largest trading nation, and the world’s largest exporter of goods and the world’s second largest importer of goods. The US is the world’s largest importer of goods.

So you can see straight away why Trump is targeting Canada, Mexico and China with tariff threats, and why the US needs the best terms possible for export deals with these countries. Because negotiating trade deals with these countries provides the biggest bang for the buck on import and export flows.

Tariffs also literally earn ‘bucks’ for the US government (at the expense of consumers) given that import tariffs are federal government revenue, and are imposed at the point where goods arrive into the US, with importers legally liable to pay the tariff on goods imported. Tariffs are collected by the Customs and Border Protection (CBP), and the money collected from tariffs goes to the US Treasury’s general fund.

Targeting BRICS – A Bridge too Far?

In contrast to tariff threats against Canada, Mexico and a stand-alone China, where the objective is to secure better trade deals with individual countries the threats against BRICS are a different a different kettle of fish entirely and represent a significant escalation,  since the goal is to stifle the foundation of a new BRICS multilateral (and non-dollar) financial system that could be a threat to the US petrodollar as the global reserve currency.

Image credit: globaleurope.eu

Given that Trump’s threats go to the very heart of the BRICS plans for economic and geopolitical independence from the West and is literally an attack on their rival framework, it would be realistic to assume that BRICS will strongly resist such attempted coercion.

As a reminder, BRICS now has nine full members, which are India, Brazil, Russia, South Africa, the UAE, Iran, Egypt and Ethiopia. And now following the huge BRICS Summit which took place in Kazan Russia during October (where leaders and senior officials of 33 countries attended), BRICS now also has 13 ‘partner countries’, which are Thailand, Malaysia, Vietnam, Indonesia, Turkey, Bolivia, Cuba, Belarus, Kazakhstan, Uzbekistan, Algeria, Nigeria and Uganda.

The 9 BRICS members has a combined GDP of more than US$ 26 trillion, and a combined population of 3.6 billion. The 13 BRICS partner countries and Saudi Arabia (which has already been invited to join BRICS) have a combined GDP of over $6 trillion, and a combined population of over 1 trillion. Together these 23 countries have a combined GDP of $35 trillion and a population of 4.5 billion.

Trump has therefore now picked a tariff fight with countries that have a larger combined GDP than US GDP, and whose populations represent more than 55% of the world’s total population.

Threatening tariffs on countries such as India, Brazil and the UAE, not to mention a second set of threats against BRICS member China, is likely to trigger retaliatory tariffs, and a global trade war that could spiral out of control. Whereas the trade war against China from 2018 – 2019 could be called Trade Wars 1.0, what we are now facing is a much bigger and ominous Trade Wars 2.0.

This is going to create unexpected consequences for the global economy as well as huge uncertainty and a flight to safe haven assets, including gold and silver.

The central banks of BRICS countries and countries that are ‘friends of BRICS’ have already been loading up on accumulating gold reserves due to sanctions risk created by a raft of sanctions imposed by the US and G7 on Russia, and any countries dealing with Russia.

Now with the realisation that the imposition of tariffs by the US will happen from early 2025 onwards, you can add ‘trade war’ risks to sanctions risk. A double whammy, that should keep gold as the number one asset being continually accumulated by non-Western central banks, all of which is supportive of a rising gold price.

Why tariffs create Uncertainty and Inflation

Tariffs by their nature create uncertainty and inflation, as well as disrupting supply chains.

By definition, financial markets and businesses like certainty, as it provides an environment that allows more predictable forecasting, planning and investment decisions, and allows avoidance of business risk. Imposing import tariffs (taxes) on goods creates economic uncertainty because it muddies the waters on future visibility of prices, business profitability and employment levels, and makes business planning and forecasting far more difficult.

Using import tariffs as a policy also runs the risk of reciprocal tariffs by trade partners, a situation which can spiral out of control in a globally connected trade system, and make future economic projections even more uncertain, which all has a detrimental effect on company profitability, dividends and stock prices.

Tariffs also increase the costs of goods and services for the importing country, and thus contribute to higher inflation in that country. Import tariffs are imposed at the point of entry, and it is importing companies which have to pay the tariffs. These companies then pass this extra cost down the supply chain, ultimately to their consumers. So prices go up, i.e. price inflation. US tariffs on foreign imports don’t penalise the exporting country. They penalise US companies and consumers.

For example, a 2020 research paper by economists from the New York Fed, and Columbia and Princeton universities using 2018 trade data found that the costs of US tariffs were “passed on entirely to US importers and consumers.” This is worth repeating – businesses pass increased costs to consumers through higher prices, i.e. inflation, and consumers can buy less with their income than previously as goods are now more expensive.

For example, as a consequence of US import tariffs om Chinese goods entering the US, there is currently a 7.5% tariff rate imposed on coins of Chinese origin, and this also applies to the importation of Chinese bullion coins such at the Gold Chinese Panda coin made by Chinese state mints, where new gold Pandas imported into the US incur a 7.5% tariff which will then be passed downstream to the bullion buyer.

As Alan Siger, president of Washington DC trade group, the Produce Distributors Association said at the end of November: “Tariffs distort the marketplace and will raise prices along the supply chain, resulting in the consumer paying more at the checkout line.”

Once tariffs are imposed on imports from countries like China, they are rarely rolled back. For example, all of the import tariffs imposed by the first Trump administration against China were still kept in place by the Biden administration.

Tariffs are also a huge disruptor of supply chains. When tariffs are imposed on goods, such as electronics, that are manufactured on behalf of US companies in places such as China, these companies will, because of now higher costs,  look to move those manufacturing facilities to other countries such as Vietnam or Malaysia. This again both increases the costs of doing business and is a disruption of supply chains. Import tariffs also slow down customs clearance, as the duty has to be paid before the customs officials will release the goods. This also affects supply chains and just-in-time production.

Tariffs also have knock on adverse effects on financial markets. Equities take a hit, as tariffs make companies less profitable. FX markets take a hit as tariffs cause FX volatility and can undermine a country’s exports, making its currency weaker.  Commodity markets can take a hit if tariffs make raw materials more expensive and disrupt supply chains. Bond markets can take a hit if tariffs boost inflation and slow economic growth, with governments facing the dilemma of how to set interest rates in this environment of low growth and high inflation.

Under the above tariff and trade war scenarios, precious metals act as a beacon of stability. Firstly, gold is famously reliable as a safe haven during times of uncertainty and geopolitical crises, such as trade wars, because it is a highly liquid asset that lacks of counterparty risk, and acts as financial insurance. Investors flock to gold in such times due to gold’s ability to preserve wealth. While the gold price usually appreciates during such times, it doesn’t necessarily always rise, but sometime just remains steady when all other asset classes are falling. This still meets gold’s definition as a safe haven.

As the World Gold Council says in a 2024 report titled “Gold as a strategic asset“:

“Investors have been able to recognise much of gold’s value over time by maintaining a long-term allocation and taking advantage of its safe-haven status during periods of economic uncertainty."

The World Gold Council’s 2024 Central Bank gold Reserves Survey, which surveyed 70 central banks, found that ‘inflation concerns’ and ‘geopolitical instability’ are two of the top three factors – alongside ‘interest rate levels’ that motivate central banks to hold and accumulate gold.

Of emerging marker central banks, i.e. those central banks which have been doing the most gold buyers over recent years, a full 96% and 76% respectively of emerging market central banks rated “inflation concerns” and “geopolitical instability” as relevant reasons for including gold a as reserve asset, which is another way of saying that they hold gold as as an inflation hedge and as a safe haven.

These survey results for gold being a safe haven and inflation hedge are borne out by actual confirming statements by the central banks that are actively buying gold. As Polish central bank presidentAdam Glapiński said in July 2021:

“Gold acts like a safe haven asset, in that its value usually grows in circumstances of increased risk of financial or political crises or turbulences. In other words, the price of gold tends to be high precisely at times when the central bank might need its ammunition most.” Source

And in a statement by the Hungarian central bank when it announced the purchase of 15.5 tonnes of gold in September 2024:

“Amid increasing uncertainty in the global economy, the role of gold as a safe haven asset and a store of value is of particular importance, as it enhances confidence in the country and supports financial stability." Source

And staying in central Europe, in neighbouring Serbia, the governor of the Serbian central bank Jorgovanka Tabakovic, told Bloomberg news in November 2024 that:

“Gold is gaining value and importance in times of global turbulences, especially in geopolitical conflicts and periods of high inflation. Unfortunately, in recent years we’ve seen both factors at play.” Source

Secondly, like gold, silver acts as a safe-haven asset during times of financial crises and geopolitical instability, with the silver price and gold price showing high positive correlation, and the silver price even rising more than gold during such times.

A timely new study published on 19 November by the Silver Institute titled “Silver is a Highly Strategic Asset for Institutional Investors Seeking Diversification and Risk-Reduction” analysed a series of geopolitical events since the early 1980s – such as wars, financial crises, and global instability – and finds that silver has consistently served as a safe haven asset during major geopolitical crises, outperforming gold in percentage price gains.

“the average price increase was 15% for silver and 12% for gold. It is notable that the percent change in silver price has exceeded the percent change in the gold price consistently for every geopolitical event listed in the table since 2004.”

This outperformance is because, like gold, silver has no counterparty or default risk, and investors move to silver during heightened geopolitical tensions,  but silver is more volatile and overshoots the gold price appreciation. The same study also finds, as is well known, that silver is an inflation hedge, and concludes that:

“Investors seek silver for its safe haven quality during periods of political and economic uncertainty”

and that:

“Historically, silver has proven its value during times of economic and geopolitical crises, serving as a reliable hedge against inflation, currency devaluation, and systemic financial instability.”

Apart from its monetary role and safe haven and inflation hedging properties, silver is also, don’t forget, an industrial raw material, and if a global trade war ensues that disrupts imports into the US from Mexico, China and beyond, this could have an adverse effect on silver supply and increase the ongoing silver deficit, which would be beneficial to the silver price.

Conclusion:

With the entry of the second Trump administration to the White House now mere weeks away, the playbook outlined above on how Trump uses tariffs should be plain to see – an aggressive reliance on tariffs as both a weapon and a bargaining tool, a renegotiation of trade agreement so as to boost US interests, and unpredictable disruption of global trade norms despite the collateral damage within global markets.

Trump also has a track record of sabotaging international trade agreements, which again leads to huge uncertainty in the global economy. On 27 January 2017 (just one week after being inaugurated on 20 January 2017), The TPP was the largest planned international free trade agreement in history, and apart from the US, involved large and powerful countries such as Canada, Mexico, Japan, Australia, New Zealand, Singapore, Malaysia, Vietnam and Chile. When Trump pulled the US out of TPP without warning, the rest of the countries went ahead and signed the “Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)” beginning in 2018.

So while unlikely, don’t be surprised if a Trump administration actually pulls out of the USCMA even before July 2026. Even less likely – but still possible – would be a move by Trump to pull the US out of the World Trade Organization (WTO). Trump has threatened to pull out of the WTO before, and may do so again.  Trump’s previous administration also blocked the appointment of new judges to the WTO’s dispute settlement body, so as to sabotage its ability to issue rulings. If Trump tries to pull the US out of the WTO this would cause huge disruptions to the global trade system and retaliatory measures from trading partners, but would be a major boost for safe haven assets.

All of these tactics of expanded tariffs, renegotiation of trade deals, and potential withdrawal from multilateral agreements will be used against the usual suspects of China, Canada and Mexico, but also now the BRICS, and these themes will likely dominate the international trade landscape starting in 2025.

In related developments, on 2 December Trump again used tariffs as threats on 2 December saying that the he will block the current attempt by Japan’s Nippon Steel to take over US Steel, and that he will use a combination of tax incentives and tariffs to protect US Steel. And on 30 November the US Dept of Commerce said that following a trade review, it plans to impose import tariffs of up to 271% on solar panel component imports coming in from Cambodia, Malaysia, Thailand, and Vietnam. With solar’s increasingly using of silver due to the solar market growing rapidly, these proposed tariffs are worth watching to see their impact on the silver market.

The world therefore now faces a multiyear period that not only has heightened geopolitical risk in the form of increased wars, conflicts, and sanctions risk, but there is now a heightened ‘trade war’ risk. From supply chain disruptions to trade diversion and currency volatility, the interconnected nature of modern trade ensures that no nation is entirely insulated from the impacts of a trade war among major players.

Countries at the receiving end of these tariff threats are already planning retaliatory tariffs. On 26 November, one day after Trump threatened tariffs against Mexico, the Mexican president Claudia Sheinbaum said that “one tariff would be followed by another in response, and so on until we put at risk common businesses”

The same day in Canada, a government official said that “Canada is preparing for every eventuality and has started thinking about what items to target with tariffs in retaliation.” 

With Russia still chair of BRICS until the end of 2024, Dmitry Peskov, Kremlin spokesman said of Trump’s threats against BRICS: “If the US uses force to mandate the use of the dollar, it will likely further accelerate the shift to national currencies. We’re not just talking about BRICS countries; more and more nations are starting to use national currencies for external trade and economic activities. This is a process gaining momentum globally."

The bottom-line is that all of these new threats by Trump are predicting that the new Trump administration will impose significant import tariffs starting in early 2025, which will cause huge uncertainty and costs to the global economy, and which will cause a new round of unexpected inflation, all of which will be gold and silver positive.

So the message is clear – prepare for heightened uncertainty and higher tariff triggered inflation. This will make safe-haven assets such as gold and silver increasingly attractive, offering stability in an otherwise unstable world.