Good morning.

European Union member states are set to vote today on the long-awaited Mercosur trade agreement with South American nations. If approved, the pact would create one of the world’s largest free-trade zones, covering roughly a quarter of global GDP.

Negotiated over 25 years, the deal would eliminate more than 90% of tariffs between the European Union and five Mercosur countries.

Let’s dive into today’s edition.

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U.S. importers, customs brokers, and trade lawyers are preparing for a major legal and administrative fight if the Supreme Court strikes down President Donald Trump’s sweeping tariffs. At stake are potential refunds of up to $150 billion in duties already paid under tariffs imposed using a 1977 emergency powers law.

Key Details: During arguments in November, justices from across the ideological spectrum questioned whether the International Emergency Economic Powers Act gives the president authority to levy tariffs. If the court rules against Trump, companies fear refunds will be slow, contested, or delayed, especially given the administration’s reluctance to return collected revenues.

Tariffic Fight: More than 1,000 companies—including Costco, Goodyear Tire & Rubber Co., Dole Fresh Fruit Co., Yokohama Tire, and Ricoh—have jumped into the legal fight to secure refunds of tariffs paid if the Supreme Court strikes down the Trump administration’s emergency tariff policy.

When is the verdict? The U.S. Supreme Court could rule on Friday on the legality of President Donald Trump’s tariffs, a decision that could have wide-ranging implications for U.S. trade policy and federal finances. While it is not certain the court will issue a ruling, Friday has been designated a decision day for releasing opinions, and the tariff case is widely expected to be among them.

The U.S. trade deficit narrowed sharply in October, falling to $29.4 billion — its lowest monthly level since 2009 — as President Donald Trump’s tariffs weighed heavily on imports, new Commerce Department data shows. The deficit fell to $48.1 billion in September, as imports declined and exports increased.

Cause and Effect: Imports fell 3.2% from the previous month to $331.4 billion, while exports rose 2.6% to $302 billion. The gap shrank as companies cut back on foreign purchases following the reimposition of sweeping tariffs in August and the removal of the “de minimis” exemption for low-value imports later that month.

The Big Picture: The Trump administration has pointed to the smaller deficit as evidence that its trade strategy is working. Economists, however, warn that the data may reflect temporary distortions, as businesses earlier stockpiled goods to avoid tariffs and are now drawing down inventories.

China has intensified economic and political pressure on Japan by imposing an immediate ban on exports of dual-use goods — items with both civilian and military applications — including equipment linked to rare earth elements, semiconductors, batteries, and chemicals

Story so far: The moves come after comments by Sanae Takaichi, who said a potential crisis over Taiwan could threaten Japan’s national security. China, which views Taiwan as its own territory, called the remarks interference in domestic affairs.

Chemical Reaction: China escalated matters by launching an anti-dumping investigation into imports of dichlorosilane from Japan. The chemical is a critical input in thin-film deposition processes used in semiconductor manufacturing, making it strategically important for integrated-circuit producers.

Rio Tinto and Glencore have resumed merger talks that could result in the world’s largest mining company, with an enterprise value exceeding $260 billion. The companies said discussions are preliminary but could involve an all-share deal in which Rio Tinto would acquire Glencore, reviving negotiations that collapsed nearly a year ago.

Big Picture: If completed, the merger would create a dominant global miner spanning iron ore, copper, and other transition metals critical to electrification and artificial intelligence. The renewed talks come amid a broader wave of consolidation in the mining sector and as copper prices hit record highs, underscoring the strategic appeal of scale and diversified assets.

Positive Reaction: Investors reacted swiftly, with Glencore shares jumping around 8% while Rio Tinto’s stock fell, reflecting both the potential upside and the complexity of combining two mining giants with differing portfolios, including Glencore’s coal and trading businesses. Under UK takeover rules, Rio has until early February to decide whether to make a formal offer.

Ocean freight rates on major Asia-to-U.S. and Asia-Europe routes are rising as shippers move cargo earlier than usual ahead of the Lunar New Year factory shutdowns. Data from Freightos show prices climbing across key lanes, driven by stronger pre-holiday demand and longer transit times due to ongoing Red Sea diversions.

Asia-Europe and Asia-Mediterranean rates have seen the sharpest gains, reaching levels last seen at the end of peak season. On trans-Pacific routes, rates to the U.S. West and East Coasts have also moved higher since mid-December, though increases have been less durable than on Europe-bound lanes.

Global air cargo demand rose 5.5% year on year in November, extending a strong finish to 2025, according to new data from the International Air Transport Association. Growth was driven by shippers prioritizing speed ahead of the year-end holiday season, with international traffic up an even stronger 6.9%.

Number Game: Capacity also expanded, up 4.7% globally, keeping the market broadly balanced. Asia-Pacific led regional growth with a 10.3% increase in demand, followed by Africa at 15.6%, the fastest growth rate of any region.

Europe and the Middle East also posted solid gains, while North America and Latin America saw declines as trade patterns adjusted to new U.S. tariff dynamics.

A sharp rally in copper prices is forcing Chinese buyers to step back. Prices on the London Metal Exchange surged past $13,000 a ton this week, up nearly 50% over the past year, triggering widespread “price rejection” across China, the world’s largest copper consumer.

High Price: Industrial users — from wire and cable makers to pipe and sheet fabricators — are cutting purchases as they struggle to pass higher costs down the supply chain. Surveys show roughly 60% of Chinese copper rod producers reduced or halted output in December, while processing fees fell to zero, an unusual sign of stress in the physical market.

Home Weakness: As domestic demand weakens, Chinese smelters are pushing surplus metal overseas. Refined copper inventories in China have doubled in a month to a seasonal 10-year high, while exports have surged. Analysts say demand may recover later in 2026 as clean energy, AI, and appliance subsidies absorb some of the shock.

Maersk has quietly removed its long-standing “transit disruption surcharge” after one of its container vessels transited the Suez Canal via the Red Sea in late December, marking the carrier’s first passage through the route in nearly two years.

Backstory: The move followed the Dec. 23 transit of the Maersk Sebarok and signals a tentative shift in pricing as war-risk insurance premiums ease. Maersk introduced the surcharge in December 2023 after Houthi attacks forced vessels to reroute around the Cape of Good Hope, adding time and cost to key Asia–Europe and Asia–U.S. trade lanes.

Can Hope Return? While insurance rates have fallen from roughly 0.5% of a vessel’s hull value to about 0.2%, they remain above pre-crisis levels, keeping most carriers cautious.

U.S. factory activity unexpectedly declined in December, signaling continued strain in the manufacturing sector. The Institute for Supply Management said its purchasing managers’ index fell to 47.9, down from 48.2 in November and below economists’ expectations. Readings below 50 indicate contraction, marking the sector’s 10th straight month in decline.

Weak Spots: The decline reflected firms drawing down raw material inventories at the fastest pace in more than a year as demand stayed soft. New orders shrank for a fourth consecutive month, export bookings remained weak, and factory employment fell for an 11th month

Fewer People: Amid weak demand, factory payrolls fell for an 11th consecutive month, marking the longest stretch of job losses in the manufacturing sector in nearly five years, according to ISM data. Separately, the Bureau of Labor Statistics reported that U.S. manufacturing employment in November fell to its lowest level since March 2022.