IOG Economic Intelligence Report (Vol. 4 No. 5)

The latest regulatory developments on economic security & geoeconomics

By Paul Nadeau, Visiting Research
Fellow, Institute of Geoeconomics (IOG)

The Trade Wars Have Started: U.S. President Donald Trump imposed tariffs of 25 percent on imports from Canada and Mexico and an additional 10 percent tariffs on goods from China on March 4, citing frustration with the continued flow of fentanyl across the borders of both countries. Canada and China retaliated almost immediately, with Canada responding with 25 percent tariffs on $20.7 billion worth of U.S. goods which will be expanded to $86.2 billion worth in 21 days from date of the announcement, while China responded with 15 percent tariffs on chicken, wheat, corn and cotton, and a further 10 percent tariff on sorghum, soya beans, pork, beef, aquatic products, fruits, vegetables and dairy products. Both countries also announced that they would begin procedures against the United States at the World Trade Organization (WTO).

On March 5, automakers received a one-month reprieve from the tariffs and will continue to operate under the provisions of the U.S.-Mexico-Canada Agreement (USMCA) following a meeting with representatives of the auto industry. The Trump administration also delayed the revocation of the de minimis threshold of articles from Canada and Mexico until adequate systems are in place to fully and expeditiously process and collect tariff revenue” (the de minimis trade provision allows goods worth $800 or less into the United States duty free and with fewer inspection requirements).

European Union Adopts 16^th Sanctions Package against Russia: The EU adopted the 16^th round of sanctions against Russia for its invasion of Ukraine on February 24. The current sound of sanctions includes a ban on primary aluminum imports and the sale of gaming consoles and lists 73 vessels of the “shadow fleet” that is used to evade sanctions on energy and other exports. It also lists Garantex, a Russian cryptocurrency exchange, which is “closely associated with EU-sanctioned Russian banks”, the first time the EU has targeted Russia’s use of cryptocurrency to evade sanctions.

White House Announces “America First Investment Policy”: On February 21, the Trump administration announced the “America First Investment Policy” to address inward and outbound investment. The goal is to address national security threats from “foreign adversaries” (defined as China, including Hong Kong and Macau, Cuba, Iran, North Korea, Russia, and the Maduro regime in Venezuela). The memorandum instructs the Committee on Foreign Investment in the United States (CFIUS), the agency responsible for screening inbound investment for national security risks, to restrict investors from those countries from making investments in technology, critical infrastructure, healthcare, agriculture, energy, raw materials, and other strategic sectors. It also calls on Congress to pass legislation to expand CFIUS’s authority to include “greenfield” investments as well. For non-adversarial countries, the memo calls for a “fast track” investment review process with expedited environmental impact reviews for investments over $1 billion. The memorandum also encourages foreign investment so long as those investors do not acquire controlling, voting, or corporate governance interests.

Renewed Action on DST Retaliation: On February 21, the Trump administration directed the Office of the U.S. Trade Representative to begin an investigation into the possibility of imposing retaliatory tariffs against countries that impose a digital services tax (DST) on U.S. tech companies. Austria, Canada, France, India, Italy, Spain, Turkey, and the United Kingdom currently impose DSTs on sales revenue and other digital services within their borders. In Trump’s first term, USTR launched an investigation of DSTs under Section 301 of the Trade Act of 1974 which allows the President to impose tariffs against countries found to engage in unfair trade practices against the United States. As a result of the initial investigation, the Biden administration imposed 25 percent tariffs on $2 billion worth of goods from six countries, but suspended the tariffs to allow international negotiations on a comprehensive solution to continue which ultimately resulted in a 15 percent global corporate minimum tax. Trump withdrew from the global tax arrangement in his first day in office in January.

Trump Announces Section 232 Investigation into Softwood Lumber Imports: On March 1, the Trump administration issued an executive order directing the Secretary of Commerce to initiate an investigation into the national security impacts of imports of softwood lumber into the United States. The investigation has been initiated under Section 232 of the Trade Expansion Act of 1962, which allows the President to impose tariffs if imports of a certain product are deemed threatening to national security. The results of the investigation will be included in a report due no later than November 26, 2025.

Trump Targets Pharma: President Trump floated the possibility of 25 percent tariffs on pharmaceutical imports into the United States. Pharmaceutical products are generally excluded from tariffs under WTO rules. Trump did not provide a timeline for imposition and did not suggest an authority under which tariffs would be imposed.

USTR Seeks Public Comment on Chinese Shipbuilding Measures: The Office of the United States Trade Representative (USTR) is inviting comments from the public on proposed Section 301 actions in response to China’s shipbuilding practices. The plan proposed by USTR would impose fees of up to $1 million when a Chinese-built vessel enters a U.S. port and would steadily increase requirements that products be shipped on U.S.-flagged and operated vessels.

Forced Retirements in the U.S. Commerce Department: Two senior career officials at the Commerce Department, Matthew Borman, principal deputy assistant secretary of commerce for export administration, and Eileen Albanese, director of the Office of National Security and Technology Transfer Controls, were both pushed out of their positions by the Trump administration. The moves have raised questions about the Department’s capacity to address economic security policy which is expected to be a priority of the Trump administration.

Hong Kong Gets Same Treatment as PRC in Trump Tariffs: The Trump administration’s February 1 insert into the Federal Register of additional tariffs for China mentioned that Hong Kong will get the same tariff treatment as China, a first in the relationship since the 2020 Executive Order on Hong Kong Normalization. The change is notable given Hong Kong’s designation as an autonomous territory and the general principle of “one country, two systems” that guided Hong Kong’s relationship with mainland China.

Why Trump might want a short-term economic downturn

By Andrew Capistrano,
Visiting Research Fellow, Institute of Geoeconomics (IOG)

In the early hours of 5 November 2024, as the US election outcome became clear, markets began a month-long rally on news that Donald Trump would return to the presidency. His first-term policies, like cutting taxes and reducing regulations, had led to an average pre-pandemic GDP growth rate of 2.5 percent, and during the same period both the Dow Jones Industrial Average (DJIA) and the S&P 500 increased by nearly 50 percent. Investors were optimistic that Trump’s second term would have a similar effect on their portfolios. But this optimism proved to be short lived. By 4 March 2025—the date Trump finally imposed tariffs on China, Canada, and Mexico—US equities had sharply declined, with the major indices erasing all their post-election gains.

Although some investors surely thought Trump was bluffing about using tariffs, the prospects of a trade war alone do not account for this market reaction. Rather, the fact that Trump initially threatened tariffs, then postponed them, before finally deciding to follow through, highlighted the uncertainty surrounding the new administration’s unorthodox economic policies, suggesting that US markets had entered a period of increasing volatility. There are of course opportunities to make bets that can pay off in such an environment. Still, traders should consider the possibility that Trump might want to take what, for a politician, seems to be the most unorthodox approach of all: inducing a market contraction or even a short-term recession to advance his second-term economic agenda.

There are several reasons why this may be true. Politically, the impact of the US business cycle on electoral politics is well known; if a downturn is to occur in the next two years, it is in Trump’s interest that it takes place as close to Biden’s presidency and as far from the 2026 midterm elections as possible. Biden worried for much of the last two years of his term that a recession would doom his reelection campaign, opting to use the “soft landing” narrative to reassure voters. Since Trump at the time stated he believed the “soft landing” to be a myth, it is reasonable to assume he has considered the possibility that economic problems caused by Biden’s policies could be actualized during his presidency, leading voters to blame him and the Republicans.

Trump furthermore believes much of the pandemic-era recovery that occurred under Biden was driven by massive and unsustainable government spending. In this view, the 2021 rebound in GDP was solely a product of fiscal stimulus and pent-up demand. This led to surging inflation throughout 2022, and in response the Federal Reserve aggressively hiked interest rates from 0 percent to over 5 percent in 2023. Treasury Secretary Scott Bessent argues this created a “demand shock”, which was exacerbated by a “supply shock” from Biden’s willingness to increase regulations. The result was persistent inflation and a drag on growth inherited by the Trump administration.

Thus the political rationale for allowing a short-term downturn is that if it happens now it can be blamed on Biden—or at least justified as necessary to “fix” the “Biden economy”. For instance, Bessent has stated that economic indicators would only reflect “Trump’s economy” after “six to 12 months”.

From this follows the economic rationale for a downturn. On the one hand, some of Trump’s policy proposals will be a drag on short-term growth. On the other hand, the administration believes that this can be offset by higher growth rates, but only after an adjustment period.

To see why such a period may be necessary for growth, consider Bessent’s “3-3-3” policy, which provides the broad strokes of the Trump administration’s economic goals. First, and most relevant here, Trump was elected with a mandate to end inflation and he thinks the only way to accomplish this is by reducing government spending. Therefore, Treasury aims to cut the deficit to 3 percent of GDP (i.e., under $1 trillion) from the present level of over 6 percent. Yet even if reduced government spending leads to an economic contraction, there could be an upside: the Federal Reserve would be forced to cut interest rates, lowing borrowing costs and mortgage rates. Second, Trump believes that energy costs are a prime driver of inflation, so the US aims to produce an additional 3 million barrels of oil per day, an increase of around 23 percent. Third, the administration hopes to boost annual growth rates to 3 percent of GDP by reducing regulations, cutting taxes, and increasing investment. These three goals will not be achieved overnight. However, it is arguably better to build long-term growth on a more solid economic foundation, intentionally speeding up the business cycle to get through the downturn, past the trough, and on a upward trajectory to the next peak before the new policies begin to take effect.

Then there is the trade policy. Trump seems set on imposing reciprocal tariffs in his second term, since “reciprocity” is concept he has long advocated. He fundamentally believes that tariffs can not only protect US industries and re-shore manufacturing, but also become a revenue source to compensate for tax cuts. But tariffs would need to be enacted under US trade law, such as Section 232 (national security) or Section 301 (unfair trading practices), both of which require the president to commission a trade study before imposing them. In the interim period, Trump might have thought it strategically wise to launch a limited trade spat to allow markets to price in the risk from tariffs that will come later. This could explain why Trump declared a “border emergency” and used a novel legal authority (emergency economic powers) to impose tariffs on China, Canada, and Mexico. The logic would be to gauge the market’s reaction and let it adjust to a relatively minor trade shock before enacting the wider tariff agenda.

In this context, it is important to examine whether the reputation Trump built during his first term—as being very responsive to stock market signals—overlooks two new factors.

First, Trump and his second-term economic team may be willing to tolerate a deeper downturn than most market participants expect. In his State of the Union address on 4 March, Trump acknowledged that his economic policies would need “a little bit of an adjustment period” before they boost growth and create jobs: “There may be a little disturbance, but we’re fine with that.” Similarly, when markets reacted negatively to his initial tariff threats in early February, Trump told reporters that “we may have some short-term pain” but in the long term his tariff policies would raise revenues and incentivize foreign firms to increase US production. Coming from a president who revels in extolling how great his economic policies are, these warnings should be taken seriously.

Second, Trump’s team may be monitoring a broader set of asset classes and market indicators over equity prices alone. According to Commerce Secretary Howard Lutnick, “the stock market is not driving outcomes for this administration”. Instead, Bessent has consistently declared that he is “laser-focused” on 10-year bond yields, actively attempting to push them lower to around 3 percent. In this regard, the new administration has been somewhat successful, reducing yields from 4.6 percent when Trump issued his tariff threats in February to around 4.2 percent as of early March. The belief is that the Federal Reserve will follow the credit market to lower interest rates, helping the government manage its deficit and refinance its debt. Therefore, Trump may counterintuitively see lower 10-year yields as an indicator of success, even though they usually reflect economic uncertainty and expectations of contracting growth that make investors sell equities and buy bonds.

It is also worth noting that Bessent’s long-term aim is to “rebalance the economy from Wall Street to Main Street”. This means soaring stock markets may have a lower priority than interest rates or manufacturing. Trump appears resolved to endure short-term market volatility, weaker capital markets, and slower growth in pursuit of these goals. But markets still matter; and they do not have a limitless tolerance for uncertainty and unorthodox economic policies. The question is how far of a downturn and decrease in consumer confidence the administration will accept during this “rebalancing”.

Trump may take inspiration from President Reagan, who went from a deep recession in 1981-1982 to surging growth in 1983-1984. But inducing a downturn is a high-risk, high-reward strategy. Trump, who is at the peak of his power, may wager that if a downturn must occur, he should be the one to induce it—sooner rather than later, and on his terms.

Disclaimer: The views expressed in this IOG Economic Intelligence Report do not necessarily reflect
those of the API, the Institute of Geoeconomics (IOG) or any other organizations to which the author belongs.

API/IOG English Newsletter

Edited by Paul Nadeau, the newsletter will monthly keep up to date on geoeconomic agenda, IOG Intelligencce report, geoeconomics briefings, IOG geoeconomic insights, new publications, events, research activities, media coverage, and more.

Click here to subscribe