There has been considerable anxiety among market participants, in the media and in the political sphere. With his often reckless and economically ill-conceived policies, Trump isn’t only putting the US’s reputation on the line as a reliable and market-focused partner. The tariffs, which have been imposed unilaterally and largely unjustifiably, also undermine international rules and institutions that are crucial to an open and stable global trading system.
A few weeks later, we’ve seen much of Donald Trump’s combative presentation be qualified. The tariffs actually implemented are often significantly lower than announced, or have been suspended. The aggressive communication on “Liberation Day” has also given way to a more conciliatory tone. The talk on all sides is of “good deals” between “good partners”. The markets look to have tamed Trump somewhat.
But that shouldn’t obscure the fact that this year the United States is imposing significantly more and higher tariffs than before. Their consequences will be felt – in the form of higher inflation and lower growth. Companies will adapt to this in the medium term, but that does not lessen the burden in the short term. Nevertheless, we are a long way from the “end of the world” initially imagined by more feverish commentators. What can we take from all this? Probably that we should respond to Trump’s pronouncements with a little more composure. His statements can’t be taken literally. Yet, we do have to take them seriously – particularly on America’s relationship with China.
The United States and China are competing for economic and political leadership on the world stage. The outcome of this rivalry is easy to predict. China’s rise is likely unstoppable in the long term. We can see this simply from the fact that even during economic crises, the Chinese economy grows faster than the USA in very good years. It’s only a matter of time before China overtakes the USA. No trade policy can prevent this happening.
Until then, the USA is set to maintain its active rivalry with China. This suggests further tensions for the time being, even if the rhetoric coming from both sides after their talks in Geneva sounded positive. And aside from the tariffs, there are other geopolitical issues. One is Taiwan or the dispute over sovereignty in the South China Sea.
But before these flashpoints flare up, the increased tariffs will lead to higher inflation in the USA. At the same time, the US economy is facing a slowdown. Normally, we would expect to see a recession as the only event that could bring inflation back down. Lower growth, higher inflation or even a recession are all arguments against excessively high risk appetite on the financial markets.
We therefore remain cautious. It’s too early to take big risks.
