by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with what appears to be the start of a new US effort to erect protectionist import tariffs on dozens of countries around the world, starting with Canada. We next review several other international and US developments that could affect the financial markets today, including a move by China to partially lift its ban on refined fuel exports and potential new US steps to bar domestic firms from using Chinese artificial intelligence models.

United States-Canada: The Trump administration yesterday said it will impose a new 50% tariff on a range of Canadian goods, but with exemptions for energy, potash, fish, and several other categories. The new tariffs are expected to affect about $20 billion of the $383 billion in Canadian goods imported into the US (using figures from last year). According to the White House, the new tariffs aim to offset the burden from Canadian rules that it says discriminate against the US.

• The new tariffs against Canada serve as a reminder that US trade policy can still shift dramatically in ways that could affect US and foreign stocks.
• In fact, reports say the president is also mulling new tariffs on dozens of other countries as his 10% global duties are set to expire later this week.

United States-Israel-Iran: Now that the June ceasefire between the US and Iran has effectively collapsed and both sides are launching attacks against each other again, AAA yesterday said the average price of gasoline in the US has again risen above $4.00 per gallon, though it remains below the $4.56 peak reached in May before falling to $3.79 earlier this month. If sustained, the resurgence in gas prices could cause a rebound in the consumer price index and further complicate Republican prospects in the November elections.

China: On a more positive note, new reporting details how Beijing this month has lifted its ban on refined fuel exports, at least in part to take advantage of high global prices and ample inventory levels. However, the reports say that even as the government allows refiners to resume their exports, they can only ship fuels under allocated quotas while keeping their inventory levels above their end-February levels. The resumed exports could still help limit the price of global energy products, but not as much as if Chinese refiners could again export freely.

China-Philippines: After more than a year of calm around the disputed Second Thomas Shoal in the South China Sea, where the Philippines maintains a grounded navy ship as an outpost to deter China’s efforts to take control of the outcropping, Chinese coast guard personnel and Philippine sailors in small boats clashed with one another yesterday using paddles, sticks, and batons. One Philippine sailor was reportedly injured in the melee before it ended.

• The fight at Second Thomas Shoal is further evidence that China is trying to take advantage of Washington’s current effort to ease bilateral tensions to establish a kind of détente with Beijing.
• As the US pulls its punches with China on issues such as trade and technology policy, it appears that Beijing has started to see what kind of territorial aggression and other initiatives it can get away with. The risk is that the Chinese will go too far and force the US to act, potentially sparking a sudden, new escalation of tensions.

United Kingdom: As expected, newly minted Prime Minister Andy Burnham has begun his term with an expensive new fiscal proposal that would subsidize household energy prices this winter. By removing the value-added tax from electricity bills, the move would cut about 45 GBP ($60) off a typical annual electricity bill and would cost about 850 million GBP ($1.1 billion) in 2026-27, based on estimated electricity prices. The proposal has quickly generated accusations that the government hasn’t clarified how the policy would be funded.

US Politics: In Maine’s election for the US Senate, Democrat Troy Jackson has consolidated the support of his party and is now expected to become the Democrats’ new official candidate after the initial candidate, Graham Platner, withdrew over a scandal. Jackson is a former state Senate president, a small-time lumberman, and a progressive Democrat who supports Medicare for all, abortion rights, and economic populism. However, he began his political career as a Republican who embraced conservative social policies.

• Despite morphing into a progressive Democrat from a conservative Republican, it is unclear how widely Jackson will be supported in the November mid-term election.
• Incumbent Republican Sen. Susan Collins is considered a formidable opponent with ample financial resources to protect her seat.

US Artificial Intelligence Industry: After our discussion in yesterday’s Comment about the new, open-source Chinese AI models that rival cutting-edge US models at a fraction of the cost, new reports say the US government is considering a ban on US firms using the Chinese models. The discussion mostly revolves around the security risks from using a geopolitical rival’s AI, but a ban would also insulate the US firms from competition and help protect their huge investment in models and computing capacity.

• Just as cheap Chinese products have decimated other US industries over recent decades, the powerful, inexpensive new Chinese AI models could potentially make the costly US models uncompetitive. Fear of such a development has already begun to weigh on the stock prices of major US firms related to AI and the AI infrastructure boom.
• Importantly, new reports say Beijing is mulling restrictions on Chinese firms exporting some aspects of their AI technology. For example, the government is considering banning Chinese firms from transferring key model training data overseas or allowing their model weights to be downloaded by foreign users. However, China would still let overseas customers access the models and services.
• If the US administration fails to ban the Chinese competitors, investors could be spooked and the AI frenzy could come to an end. If the administration does impose a ban, it could keep the AI boom going for a while yet, though at a steep economic cost.

US Stock Market: Consistent with investors’ increasing concern about the big, AI-related tech firms that dominate the stock market, a useful Wall Street Journal article today highlights how market prices and breadth are currently diverging. The article notes that there have been 52 trading days so far this year when the S&P 500 price index went in one direction but most stocks in the index went the other way. That ties 2000 for the third highest number of such instances this century, and the year is barely over half-way finished.

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