How worried should markets be about a new round of trade wars if Trump wins?

With the possibility of Donald Trump returning to the White House, market analysts are evaluating the potential impact of a new round of trade wars.

According to Evercore ISI, a second Trump administration would likely reintroduce volatility into the markets.

“We believe Trump 2.0 would mean the return of trade-related market volatility and we would not be surprised to see markets start pricing some of that risk soon,” the Evercore team stated.

Trump’s proposals include sweeping measures such as a 10% across-the-board tariff on all U.S. imports and a 60% tariff on all imports from China. These measures are notably more extensive than the tariffs imposed during his first term and those maintained by President Biden with strategic adjustments. The extreme starting points of these proposals suggest Trump is serious about using tariffs more broadly.

Even if the proposals serve as a negotiating tactic, tariffs would still increase significantly under Trump 2.0. Evercore highlights a subtle but noteworthy shift in Trump’s approach to trade deficits, implying a serious intent to use tariffs on a more sweeping basis, an adjustment exemplified by former U.S. Trade Representative Robert Lighthizer’s comments on the need for balanced trade over superficial fair trade.

If implemented, even a scaled-back version of these proposals could push U.S. tariffs to levels not seen since the 1940s, Evercore cautioned.

As a result, this potential for increased tariffs could lead to considerable market uncertainty, similar to the volatility observed during the 2018-2019 trade disputes. Evercore ISI also pointed out that trade policy uncertainty can trigger significant market volatility as investors struggle to interpret policy statements and predict foreign retaliation.

During Trump’s first term, the S&P 500 experienced a cumulative 11% decline on days of major trade policy announcements, underlining the sensitivity of markets to such events. A second term could see similar patterns, with the introduction of more aggressive trade measures against China and other countries.

The Evercore analysis believes that, while markets partly or fully recovered within five trading days following many announcements, the initial uncertainty contributed significantly to observed volatility.

Moreover, the implementation process of these proposals “would not be straightforward or predictable,” Evercore notes, adding to market uncertainty.

“As we saw in 2018-19, trade policy uncertainty can trigger market volatility, as investors may struggle to interpret Trump’s statements and their impact and to predict foreign retaliation. And while this piece focuses on tariffs, there will be a host of other trade issues up for debate,” the investment bank added.

While markets are currently pricing little risk of a new round of trade wars, the prospect of Trump’s return and his aggressive trade proposals could lead to significant market volatility.

As such, investors should be prepared for potential disruptions and closely monitor the evolving political landscape.

“Given Trump 2.0’s potentially far-reaching plans on trade, we believe markets could begin pricing trade-related risks across a range of areas,” Evercore wrote.