There are a few layers to the tariff conversation that are worth elaborating on given the recent ‘Liberation Day’ tariff announcements and the subsequent share market reaction. Firstly, there's no scenario where you introduce tariffs, and it directly results in better global growth. This is not a positive for the global economic outlook. The share market and company share prices are falling because the prospect of sustained tariffs and potential trade wars are negative for economic growth and business conditions. Investors are no longer under the illusion that Trump is just posturing.
By applying tariffs across the board, he has laid the foundation for every country to effectively renegotiate their existing deals on his behalf and make a better offer. So, in the first instance that is an efficient way to conduct a bulk negotiation. Much simpler than going from country to country one at a time. The tone has been set. Some countries are more in need of the US than others and more amenable to doing a deal. I expect those countries to be rewarded and highlighted to set the tone. Others will simply be opportunistic. Those who retaliate will be penalised.
His policies are changing the shape of global alliances. Europe understands that they can no longer rely on the US and will massively boost defence spending. When there is someone else to do the heavy lifting others will happily take a step back. But once there is not then they become surprisingly capable. So, Europe will be okay with or without the US. The implications here are far reaching and bring into question the USA’s willingness to help allies who have always assumed that they have the US protection if needed. That extends to Australia too.
Prioritising the USA’s national security is more real than ever. The initial phase of the decoupling from China in the USA supply chain saw a range of nations such as Vietnam benefiting. Suddenly imports from China fell and the US was importing more from Vietnam. It looked like the risks in the supply chain were being addressed. But simultaneously Vietnam was importing more from China. There was merely an extra link added to the chain not a new chain. The aggressive tariffs on placed like Vietnam indicate that the US is not only aware of this but very serious about genuinely decoupling from China.
Part of the complication is that the tariffs create far reaching implications across every aspect of the global economy. It will take some time for the consequences to be understood and for the second and third order effects to flow through. These areas range from manufacturing and jobs in the US to the redirection of investment capital across the world. There will be impacts on interest rates, inflation and consumer sentiment. I have concerns about stagflation in the US as this plays out.
The rise of anti-USA sentiment across the world will have an economic impact too. Travel from Canada to the US is down 70% since the introduction of tariff talks. Will Canadians stop buying US cars like Fords and Teslas? Quite possibly. But will the rest of the world stop buying McDonalds or Coca-Cola? Will they stop using Facebook or Microsoft? I think that is unlikely. However, investors need to consider the implications of all these issues on a case-by-case basis.
Trump’s approach is all about extracting better trade outcomes for the USA in the short term and national security and strategically positioning the USA in the long term. This is all about the USA and the USA’s position in the world in the years ahead. The Trump Administration is clearly of the view that where a country benefits from engaging with the US economy then there is a price to pay to participate. When it comes to defence rightly or wrongly, this is also their attitude. As Winston Churchill once said of the US back in World War II “You can always rely on the USA to do the right thing after they have tried everything else."
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