If there were any remaining doubts about President Trump’s tariff strategy being used as a blunt negotiation tool, this weekend’s events should dispel them. President Trump announced via a social media post that there would be an additional 25% tariff on goods from Colombia, bringing the total to 50%, following Colombian President Gustavo Petro’s refusal to permit US military planes carrying deported migrants to land. President Petro swiftly retaliated with his own 25% tariff and stated he would be sending his own planes to retrieve deportees. While the threat of a protracted trade war between the US and Colombia and its potential impact on coffee and the prices of roses ahead of Valentine’s Day appears to have diminished, there are two key takeaways to consider.
First, President Trump’s use of tariffs to advance his economic and political goals both domestically and internationally has become even more unpredictable. His focus is no longer confined to the usual targets such as Mexico, China and Canada. The selection of targets will be indiscriminate, irrespective of alliances or established free trade agreements. There had been speculation that legal and technical checks might prevent arbitrary actions, but even those might be at risk. According to the Eurasia Group, the Trump Administration plans to invoke the International Emergency Economic Powers Act (IEEPA), which would grant President Trump greater latitude to impose tariffs.
Second, while this dispute with Colombia serves as a reminder not to become complacent about President Trump’s tariff threats, it does not fundamentally alter the nature or magnitude of the risk. According to Bloomberg, trade in goods between the US and Colombia was worth $33.5 billion in the first 11 months of 2024. In contrast, Mexico engages in nearly twice that amount of trade with the US in just one month. Moody’s notes that potential tariffs on imports from Mexico and the corresponding retaliatory actions would be highly disruptive, given that more than 80% of Mexico’s exports are to the US.
Market Implications
Since the beginning of the year, emerging market (EM) sovereign and corporate credit spreads, along with key EM currencies, have performed strongly. This robust performance is partly due to the absence of major negative catalysts such as aggressive tariffs against Mexico, Canada and China. Our Macro Market Trends report highlights that these countries are particularly vulnerable to protectionist policies due to their significant trade surpluses with the US. If such tariffs were implemented, they could lead to reduced exports and weakened domestic economic activity in these regions. Instead, since his inauguration on January 20, President Trump’s executive orders have predominantly focused on rolling back climate change initiatives, intensifying deportation efforts and promoting the AI industry.
As we noted in a recent blog post, the market had already priced in a considerable amount of pessimism. The current question is whether the recent rebound in performance can be sustained. We believe it can, following an initial knee-jerk reaction by the US dollar, which has recently surrendered gains against both developed and EM currencies.
After this latest episode, it is likely that the Trump Administration will feel even more emboldened to use tariffs as an economic weapon to address unfair trade practices, reduce deficits, protect key industries and manufacturing jobs, and compel economic rivals to comply with America’s demands. However, having endured the 2018-2019 trade wars involving the US, Mexico, China and Europe, the market is better prepared for another round of the well-telegraphed tariff saga, which will undoubtedly include surprises along the way. With this in mind, we maintain our view that EM has more room to run. Any unexpected catalyst prompting a significant repricing of EM assets would likely present a prime buying opportunity for EM credit and select FX and rates plays.