The article was first published in The Business Times on 5 April 2025.
Once a country, the United States of America is now under new management morphing into a company. Its new CEO prioritises profit, growth, and expansion. Laissez-faire is out; mercantilism is in. Like the 19th century British East India Company, this monopolistic conglomerate leverages its heft, fortifies its moat, and curates its customer base for revenue and loyalty. As de-globalisation gains traction, expect a cascade of reciprocal tariffs as exporting nations seek ever-shrinking markets for their surplus capacity.
Access to US consumers, military protection, or cutting-edge tech now comes with a price tag. Levies, taxes, and tariffs are just the start; reciprocity demands equal treatment for US exports. This grand experiment’s consequences are uncertain yet seismic, but I don’t think that will stop Donald Trump.
Yes, I exaggerate, but the corporate analogy sheds light on the Trump administration’s logic and rationale around tariffs. Typically, corporations don’t do things for free. They charge their customers, either directly or indirectly. Investments and expenditures are made to benefit the company first, and anyone else second. And instances where resources are misallocated are – or should be – rectified immediately. That’s President Trump’s America in action.
Trade, technology, and security policies, once distinct and separate, now merge to maximise commercial and national gain. Blending commerce with sovereignty, Trump seeks to prioritise national profit and power through economic dominance. To put it mildly, his administration is enacting a geo-political and geo-economic sea-change that will reverberate globally for years – and potentially decades – to come.
One extremely important risk in this assessment is the fate of the mighty US dollar
Traffic jam
On Apr 2, in an important first step, the US administration “welcomed” Liberation Day, being a 10 per cent universal import duty on goods and additional reciprocal tariffs on 60 nations, including China, which now faces an additional 34 per cent tariff in addition to the extra 20 per cent recently imposed. In the eyes of the US government, the tariffs are designed to redress “unfair” trade imbalances with the aim of matching or countering the tariffs and other types of barriers other countries place on US goods. The scope and scale of the announced tariffs were much worse than expected, hence markets globally sold off.
In the meantime, the affected US trading partners are readying their responses amid outrage and ridicule. Almost immediately the EU announced its intent to respond with a swathe of counter-tariffs should its negotiations with the US fail. China warned the US to cancel the latest tariffs immediately and vowed retaliatory measures if they do not. We are stepping into dangerous territory.
The latest analysis from Yale University’s Budget Lab suggested a trade war triggered by President Trump’s “Liberation Day” tariffs alone could result in a US$1 trillion hit to the US economy over the next decade. In such a scenario, losers would be commonplace; but who exactly will be the winners? I note from the tariff announcement Canada, Mexico, and the UK seemed to escape the worst of the tariffs versus other countries. But right now, the jury is out. For every credible sceptic there’s an equally credible (usually American) optimist. I think it’s a gamble, with the stakes at stratospheric levels.
How will it work? In fact, it is relatively straightforward, with the “importer of record” paying the tariff to US Customs and Border Protection based on the goods’ value. But will the importer pass the additional cost to consumers via higher prices? Or to suppliers via lower purchase prices? Or will they simply cancel the order? Data suggests that during the 2018 China tariffs hikes, the consumer paid the higher cost. Were that to happen again inflationary (and subsequently growth) consequences would be inevitable.
The administration (openly) recognises this risk but suggests Americans are willing to bear possibly higher prices if it is part of the overall cost of making America great again, particularly in that consumers would directly benefit from subsequent tax cuts. Just to remind, President Trump’s senior counsellor for trade and manufacturing, Peter Navarro, recently suggested the tariffs could raise some US$600 billion per year for the government – US$6 trillion over 10 years – which would be used to fund tax cuts. But it is also worth pointing out that estimates vary, with Yale’s experts expecting just US$1.4 trillion accruing from enacted tariffs. Again, this is a grand experiment with no end game in sight.
How should investors position their portfolios in light of how the game of international relations is being played now? Read here.
Mar-a-Loco
Are the tariffs a transactional ploy designed to extract a negotiated outcome in the US’ favour? Or are they a feature here to stay, with attendant – yet hard to predict – economic consequences? I suspect the market will hope for the best yet prepare for the worst, with much of the gains in equity markets posted in the first quarter of 2025 at risk. At the time of writing – the day after the tariffs were announced – it is still too early to properly assess the fallout, by which I mean those markets are likely to fall. But it would be reasonable to assume we should exercise caution towards China and Europe, especially since they rallied so hard in the first quarter of the year.
One takeaway from the China tariff episode in 2018 was the fact the US market quickly adjusted to the new trade dynamic, eventually continuing in their upward march once risks had been priced in. I am not so sure that will happen again. Not only will it take months for the trade landscape to stabilise but it will also take additional time to assess the economic consequences. And one extremely important risk in this assessment is the fate of the mighty US dollar.
Readers will no doubt be aware of the so-called Mar-a-Lago Accord – a speculative policy framework designed to reduce the US’ US$1.2 trillion trade deficit (2024). The accord seeks to weaken the US dollar by encouraging its trading and investing partners to sell down their dollar holdings or by swapping them into longer-dated treasuries. The idea goes that this mass dollar unwind would cause its fall in value and thereby make US manufacturing commensurately more competitive. That’s the theory; but there’s a lot that could go wrong.
Unless we anticipate a complete reversal in policy, I think we should anticipate a period of risk-off market behaviour
Which takes us quickly – but rather uncomfortably – to the question: how should I position my portfolio? Unless we anticipate a complete reversal in policy, I think we should anticipate a period of risk-off market behaviour. Against a deteriorating economic backdrop, expect core government bond yields to fall; investment grade credit to perform well; safe haven currencies – such as the Swiss franc and Japanese yen – to perform well (versus the dollar and euro); gold to anchor portfolio performance; and global equities to undergo a bout of volatility.
Source: The Business Times © SPH Media Limited. Permission required for reproduction.
