Why Is Trade Uncertainty Heading Higher?

President Trump still hasn’t settled on precisely why he likes tariffs. 

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There’s a chill in the air, a back-to-school rhythm to the calendar and a vague memory among investment strategists that fall would bring greater clarity to U.S. trade policy. I was always skeptical (here, here and here), but with my arm twisted, I would have conceded that the rules of the game could not be any less clear than they were on April 2 with President Trump’s shocking “Liberation Day” announcements.

“Uncertainty” is a squishy concept, and honest investors and corporate executives will concede that there is always too much for any of the decisions they make. But the September reading for one of the best trackers of trade policy uncertainty just ticked higher from August, reading well below the April peak but still multiples of the 40-year average. My bet is that it’s still headed up from here. 

The problem isn’t just the Trump administration’s mercurial management style. It’s that the president himself still hasn’t settled on why he likes tariffs.  He speaks most often about creating manufacturing jobs, but the deals so far also include traditional pledges to remove trade barriers and non-traditional promises of foreign investment. Other tariffs are also looming for unrelated foreign policy priorities, and all of them seem increasingly motivated by the money they bring in. 

The administration argues that clarity is returning fast with the deals it has delivered with major trading partners like Europe, Japan, the United Kingdom and Korea. These agreements set new tariff rates and extract broad promises to tackle non-tariff barriers and unfair regulations. As U.S. average effective tariffs have spiked from 2.2% to 9.75% so far, most trading partners have not only not retaliated, but they have often agreed to zero tariffs on U.S. exports into their markets.

Yes, but.

First, of course, there are still key deals to be struck.  If the European Union is America’s largest trading partner and Japan is number five, there are still no agreements with Mexico (2), Canada (3) and China (4). The U.S.-Mexico-Canada agreement still offers a framework for a review process that begins this fall, but the president’s tariffs on steel, aluminum and cars that don’t meet USMCA criteria leave significant questions about the future shape of North American trade. Meanwhile, all bets are off on where a China deal might go as the administration angles to confirm a summit this fall with Chinese President Xi Jinping.

Second, the two largest deals so far are with democracies that must secure parliamentary ratification for the agreements.  The European Parliament has become a hotbed of resentment toward the Trump administration, potentially forcing the EU delegation to return to Washington for adjustments. In Japan, the agreement looks likely to be ratified by the Diet, but faces stiff opposition from politicians angry at the 15% tariffs on auto exports to the U.S. and the promise to import more American rice.

Third, most of what has been announced are frameworks for further negotiations over the really complicated questions. Even the U.K. deal, announced in May with great fanfare when both countries needed to announce something with great fanfare, leaves huge unanswered questions around trade in pharmaceuticals, aerospace, ethanol and beef.  There remain huge unsettled questions around regulatory alignment, too.

The law of probabilities may favor the president’s strategy ...but investors and corporate executives work under different incentives.  

Fourth, there are still further sectoral tariffs coming on steel, copper, pharmaceuticals, semiconductors, lumber, critical minerals, polysilicon, commercial aircraft and trucks. Oh, and that national security pillar: furniture! None of this includes the more random tariffs like those against India over its Russian oil imports and against Brazil over its prosecution of former president Jair  Bolsonaro.

Fifth, there is the looming Supreme Court decision over the president’s use of the International Emergency Economic Powers Act to justify most of his tariffs. The president has plenty of scope to find other ways to impose similar rates on the same trade partners, but the confusion will be considerable should the court rule against the administration.  

Much of this uncertainty would fade if Team Trump ever signaled its real priorities for trade policy. But the team ranges from Treasury Secretary Scott Bessent, who apparently thinks in terms of opening markets, to the more radical Peter Navarro, who seems eager to punish abroad and protect at home.

The law of probabilities may favor the president’s strategy, since advancing lots of tariff priorities increases the odds of some of them succeeding. But investors and corporate executives work under different incentives, and greater uncertainty just makes them less eager to take a risk.