Aurelia Butler

Good morning. What will markets do in response to this weekend’s news that the Trump administration will levy heavy tariffs on Canada, Mexico and (to a lesser degree) China? Unhedged doesn’t know, other than the obvious point about weakness in the Canadian and Mexican currencies. With the Trump II administration, there is always more uncertainty. Are these tariffs meant to provoke concessions, after which they will be rolled back? The President has held out the possibility that action on immigration and drug smuggling might lead to a climbdown. He has also, however, suggested that the solution would be for Canada to become a US state, and that any retaliation (which is already happening) would result in even steeper tariffs. So far, the stock and bond markets have responded to tariff ambiguity by mostly ignoring the whole thing. Will today be the day that becomes impossible?  If the tariffs are sustained, the pundit consensus is that they will slow US growth a bit, increase US inflation a bit, reduce the probability of rate cuts this year, and increase tax revenue; and that all this will keep the dollar rising, hurt stocks, and increase short-term rates. That makes broad sense, and early indications are that is just what we will see today. But very little would surprise us. We’ll be watching homebuilders (Canadian lumber) and carmakers (Mexican parts) closely. Email us and tell us what else we should be tracking: [email protected] and [email protected]. Canadian oilWhen thinking through the negative impacts of these tariffs on the US, the first cause for alarm is oil. In 2024, Canadian oil was 55 per cent of US oil imports, and about 23 per cent of total US oil consumption. In our earlier piece on the Canada/Mexico tariffs, we downplayed oil, and said that oil markets, big and global as they are, would probably adjust. Having read up a bit, we are no longer so sure. While oil is a global market, it relies heavily on local infrastructure and, as Europe experienced after shutting Russian pipelines at the start of the war in Ukraine, supply chains take time to adjust. Oil prices remained elevated for months after the start of the Ukraine war, and the price impact was greater in Europe (Brent) than in the US (WTI) even after new seaborne routes were established.In the case of the US and Canada, there is a lot of infrastructure in place, including thousands of miles of pipelines and refineries in both countries. And US refineries are specifically tuned for heavier, cheaper Canadian oil. From Rory Johnston at the Crude Chronicles:Canada accounts for more than half of total US crude oil imports because (i) Canadian heavy crude is structurally cheaper, (ii) US refineries have spent decades investing in technologies designed to process these grades, and (iii) there is significant physical infrastructure (read: pipelines) that would take time and gobs of money to shift materially. The Trump administration presumably understands this — and the political risks involved in higher US energy prices — and so kept the tariffs on Canadian oil at 10 per cent. But even at 10 per cent, the tariffs may depress growth or increase inflation. And the pain may be felt by US industrial companies in particular. Todd Fredin, a former executive at Motiva Enterprises, a fuel distributor owned by Saudi Aramco and Shell, emailed us the following:[US tariffs on Canadian oil are] also a headwind to US industrial policy, since this is [an oil] price increase solely confined to the US, while the global price is likely slightly lowered. With the higher relative cost of energy in the US and the unpredictability of US fiscal and labour policies, new industrial investment might not be as certain.The tariffs start tomorrow.(Reiter)Big ticket discretionary goods spending looks badThe preliminary US GDP report, out last week, was pretty good; real GDP grew 2.3 per cent. It has been both an Unhedged mantra and the consensus among economists that the growth is driven by the unstoppable American consumer. In the fourth quarter, spending on goods, which has been wobbly since the end of the pandemic, was strong. Durable goods, a volatile category, grew at a 12 per cent annualised rate between the third and fourth quarter, and 3.3 per cent for the year. Cars represent more than a quarter of all durable goods spending, and car sales were robust last year (up almost 3 per cent). But, looking at the results of companies that make other sorts of durable goods, especially more expensive items, I’m wondering where the incremental spending on durable goods spending we see in the national numbers is going.It’s not going to Motorcycles at Harley-Davidson, where North American sales were down 10 per cent last quarter.  It’s not going to power boats at MasterCraft, where sales were down 31 per cent; or to other boat brands at the retailer MarineMax where same-store sales were down 11 per cent. It’s not going to fancy cookware at Williams-Sonoma, where comparable sales were down 3 per cent. It’s not going to swimming pools at Pool Corporation, where sales were down 3 per cent (and new pool construction was worse than that)It’s not going to mattresses at Temper Sealy, where sales fell 1 per cent in North America.It’s not going to Washing Machines at Whirlpool, where North American sales fell 2 per cent. The list goes on. Looking across makers and retailers of big-ticket discretionary goods, it is hard to find one where US sales are growing recently (the furniture brand RH had a good quarter, after a bumpy few years). Is all of this down to a hangover from pandemic overspending on goods, the Amazon effect, or a frozen housing market? Or is there something else going on here that we ought to pay attention to? Send us your thoughts.One Good ReadWhen Taiwan sneezes, US homebuyers catch a cold.FT Unhedged podcastCan’t get enough of Unhedged? Listen to our new podcast, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.Recommended newsletters for youDue Diligence — Top stories from the world of corporate finance. Sign up hereFree Lunch — Your guide to the global economic policy debate. Sign up here More

This article is an on-site version of our Europe Express newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday and Saturday morning. Standard subscribers can upgrade to Premium here, or explore all FT newslettersGood morning. Today, I preview the defence-focused summit of European leaders that begins in Brussels in a few hours. And our energy correspondent reveals demands for the European Commission to be tougher on member states who breach internal market rules.Battle plansEurope’s leaders will gather in Brussels today to brainstorm ways to ramp up the continent’s defence capabilities, as pressure on them to reduce their reliance on the US intensifies.Context: The one-day summit of EU leaders will focus on security, defence and transatlantic relations, with Nato secretary-general Mark Rutte and UK Prime Minister Keir Starmer also in attendance.The special guests at the EU-hosted event in Brussels’ Egmont Palace are signs of where the debate is heading. Most officials reckon that a long-term replacement for a reduced US military presence in Europe could be a “coalition of the willing”, which would pool investments and capabilities, to fill the biggest gaps most efficiently and maximise the impact of the money spent.If Russia’s war against Ukraine hasn’t already made it clear that Europe needs to strengthen its own security and defence, US President Donald Trump’s demand for defence spending to hit 5 per cent of GDP, his trade threats against the EU and his campaign to annex Greenland have made it stark.There is no shortage of ideas on how to do so. What’s required is a serious conversation on which have the broadest support.Greece’s Prime Minister Kyriakos Mitsotakis, for example, wants to exempt defence spending from the EU’s strict spending and deficit rules, and jointly raise new funding of at least €100bn.“Spending more on defence must, however, go hand-in-hand with increased efficiency,” he writes in the FT today.German officials said they expected today’s talks would “include strengthening defence capabilities in the EU, particularly the industrial base, and in the long term, aspects of financing and strengthening and deepening partnerships”.Starmer, who hosted German Chancellor Olaf Scholz for bilateral talks yesterday, will use today’s meeting to pitch “an ambitious UK-EU defence and security partnership with a number of steps to increase co-operation on shared threats”, his office said.Yet don’t expect much in the way of concrete outcomes. Officials plan for the summit’s discussions to shape a policy paper on Europe’s defence industry that the European Commission is currently working on. Leaders are then expected to agree binding pledges at their next summit in June.“If our union is to remain a pole of peace and stability, we must put in place a robust, unified and credible deterrence capability,” Mitsotakis writes. “There is no time to lose.”Chart du jour: Trade warSome content could not load. Check your internet connection or browser settings.The EU has said it regrets US President Donald Trump’s decision to hit Canada, Mexico and China with sweeping tariffs, and said it would “respond firmly” if he expands the trade measures to Europe.Law and order Thirteen EU member states want the European Commission to impose harder punishments on countries breaching the rules of the single market, writes Alice Hancock.Context: The EU’s free internal market is one of the core tenets of the union since its inception in 1957. But there are still many hurdles to the smooth flow of people, goods, services and capital across EU countries — including countries flouting the common rules.In his report on the state of the single market last year, former Italian premier Enrico Letta said the EU’s “lack of integration” in many sectors was “a primary reason for Europe’s declining competitiveness”.In a paper seen by the FT, countries including Finland, the Netherlands, Germany and Portugal argue that the rules promoting smooth business across the continent should be better enforced, preventing companies from complying with 27 different systems.The paper is to be circulated ahead of a meeting of industry ministers in Warsaw today.The 13 signatories write that the commission “seems to shy away from taking enforcement action, which may undermine the credibility of the single market”.“Unfortunately, the most powerful action, the infringement procedure, has not been used fully in recent years . . . creating a culture in which common rules can be easily circumvented without risk of punishment,” the countries added.According to the commission’s yearly law enforcement review, there was a 60 per cent drop in infringement proceedings launched by its internal market and industry directorate in 2023, compared with 2019 — the biggest drop in infringement proceedings by any directorate.The commission said that president Ursula von der Leyen had made enforcement of EU law one of her “top priorities”.What to watch today EU leaders meet for an informal summit with UK Prime Minister Sir Keir Starmer and Nato secretary-general Mark Rutte.Rutte meets separately with Starmer and with Hungarian premier Viktor Orbán.Informal meeting of EU trade and industry ministers in Warsaw.Belgium’s new federal government is sworn in.Now read theseRecommended newsletters for you Free Lunch — Your guide to the global economic policy debate. 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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Britain has a growth problem. This is not unique. The fitted trend growth of UK GDP per head between 2008 and 2023 was a miserable 0.7 per cent a year. But trend growth was still lower in France and Italy. Even in the US growth of GDP per head was only 1.5 per cent. For a host of reasons, including rising dependency ratios, adverse shocks and weak productivity trends, economic growth has tended to be feeble in the UK’s peer countries. This strongly suggests that raising growth sharply in the UK will be hard.Yet achieving just this is also vital as Rachel Reeves, the UK’s chancellor of the exchequer, is well aware. In her speech on the topic last week, she argued that “without economic growth, we cannot improve the lives of ordinary working people”. In theory, the government could focus on redistribution instead. In practice, that alternative has already hit the political and economic buffers. In the UK, growth is the priority.One area on which the government is rightly focused is planning. As the chancellor noted, “the lack of bold reform that we have seen over decades can be summed up by a £100mn bat tunnel built for HS2”. Yes, this is batty. More broadly, as Sam Freedman notes in his excellent book, Failed State, the government has long seemed unable to get things built. One of the main reasons is the ease with which people can block construction. Will this government manage to overcome these obstacles at last? It will also be essential to expand the country’s capacity to build.To consider what can be done by a country serious about such things, note that China managed to build some two-thirds of the world’s high-speed rail network in two decades. Evidently, the UK will never operate like China — and rightly so. Personally I doubt whether there will even be a modest transformation. One must also not be naive about the speed and scale of the impact on growth. Better infrastructure is arguably a necessary condition for significantly faster growth. But it will not be a sufficient one. Heathrow’s fantasy third runway has become a symbol of what the UK cannot do. But would building it transform growth? I doubt it.Some content could not load. Check your internet connection or browser settings.If faster growth requires higher investment, savings would almost certainly also need to rise. Otherwise, an unsustainably large jump in the current account deficit is likely, as the country comes to rely even more heavily on foreign savings. Higher savings and more risk-taking investment will also demand substantial changes in pension systems.What else will be needed? One requirement is a flexible labour market. A new, dynamic business is inevitably an uncertain one. It is easy to overexpand. But then the business must be able to contract as easily. Without such flexibility, new companies will start elsewhere. Excessively generous protections for workers are sure to militate against the emergence of the new economic activities that growth needs.While the government is determined to tighten regulation of the labour market, the chancellor has also promised to publish an action plan in March “to make regulation work much better for our economy”. Over-regulation can indeed stifle economic dynamism. But, as we discovered in the financial crisis, “light-touch regulation” can cause devastating economic and social damage. The recent warning from the Bank of England on these risks must not be ignored. Similarly, there always needs to be regulation of environmental damage or of abusive behaviour in the workplace. Balancing these things is hard. But it must be done. Growth matters. But it cannot be the only thing that matters.Also important will be reform of taxation and spending, It seems incredible, to take just one example, that, as the House of Lords economic affairs committee notes, “spending on incapacity and disability benefits has risen by more than 40 per cent in real terms since 2013 and now stands at £64.7bn. This is around 20 per cent higher than the UK defence budget.” That makes no sense. Policy and implementation must indeed be systematic and long-term. The UK is not good at either, alas. But it can try to seize opportunities. Donald Trump has put nincompoops in charge of the US public health system, including the National Institutes of Health. The UK should offer those adversely affected the freedom they need. This might transform the country’s position in life sciences, an area of high potential.The UK is in a low growth hole. The longer it lasts, the deeper becomes the pessimism and the more feeble the animal spirits.  It has made bad decisions already, notably the high taxation of jobs. Can it provide the disciplined, yet flexible, approach that is so badly needed? I am sceptical of its success. But I hope to be proved [email protected] Martin Wolf with myFT and on X More

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Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldUS consumers face the possibility of higher prices for popular goods such as tomatoes, avocados and tequila following Donald Trump’s decision to slap tariffs on imports from China, Mexico and Canada. The potential price rises point to the political risk Trump is taking in pursuing a trade policy that could drive up the costs of consumer goods following a presidential election in which voters expressed their frustration with high inflation. The tariffs hark back to similar actions during Trump’s first term, but that was during a period of moderate inflation and the current measures are larger. “I can imagine retailers might absorb tariffs in the short run, but I think with such sweeping tariffs, prices are going to go up,” said Amit Khandelwal, professor of global affairs and economics at Yale University. China, Mexico and Canada are three of the US’s largest trading partners, responsible for about 40 per cent of the country’s trade. The US is the largest market for tequila. Mexico and Canada are among the biggest suppliers of agricultural products including tomatoes and avocados — between 2019 and 2021 almost 90 per cent of all avocado shipments into the US came from Mexico. “You feel the pain of these price rises when you don’t have good substitutes,” said Khandelwal. “The Super Bowl is coming up, people like to eat guacamole. It could be as simple as that if there’s no real good substitute for that.”China sells the US machinery and mechanical equipment worth tens of billions of dollars a year that go into any number of popular appliances, from TVs to iPhones.  “We still don’t know how China will respond to the additional 10 per cent tariff, but it will most likely be retaliatory and lead to even higher consumer prices,” said Sina Golara, assistant professor of supply chain and operations management at Georgia State University’s business school.Some of the impact will be offset by the weaker Mexican peso and Canadian dollar, but Trump at least nodded to the inflationary risks by putting in place a lower 10 per cent tariff on energy resources from Canada, which is the US’s biggest import from the country.Morgan Stanley economists warned that the impact of the tariffs would first show up in higher inflation, with a lag to economic activity. They warned this could delay any policy action by the US Federal Reserve to lower interest rates. “If we are correct that broad tariffs on Mexico, Canada, and China will firm inflation before they slow activity, then the Fed may be on the sidelines for some time,” Morgan Stanley wrote in a note to clients on Sunday. The White House said the tariffs were aimed at putting pressure on the three countries to combat illegal immigration and the flow of drugs such as fentanyl into the US, popular issues among US voters. There is hope that signs of these numbers trending in the desired direction could mean the tariffs are lifted or pared back quickly. In Canada, the most immediate impact will be seen on the shelves of liquor stores. Most provinces sell alcohol through government-owned stores, and several have ordered their retailers to pull imported US booze from sale starting on Tuesday. Doug Ford, premier of Ontario, said its liquor stores sold nearly C$1bn of US products annually. Ontario’s ban will largely cut off a market of some 16mn people for American producers. British Columbia’s ban will be targeted on alcohol imported from Republican-led “red states,” according to premier David Eby.  Canada’s federal government on Sunday published a list of 1,256 products that will be hit in its first round of retaliatory tariffs on Tuesday.Poultry and dairy products, fresh fruit and vegetables, lumber and paper products including toilet paper, as well as some manufactured goods such as washing machines, pyjamas and handbags will all be affected. Ministers hope shoppers will be able to switch to international or domestic alternatives for these goods, while they work on details of a more far-reaching tariff response. Canadian officials said the list of goods was designed to mobilise constituencies in the US that have influence with Trump, including exporters in Republican-led states. That includes products such as orange juice from Florida, and appliances made in South Carolina and Ohio. Additional reporting by Christine Murray in Mexico City More

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