Client Update - 2nd May 2025

I am afraid we have another week dominated by you know who, standing firm, then buckling under renewed pressure against his global tariff policy. Each time he takes a step back, markets creep out of their shelters and make a little progress. Markets currently are characterised by two steps forwards, one step back.

Whilst we retain a positive view on the markets recovering, and most importantly broadening out from the US dominance of the last fifteen years, it should be remembered that current market volatility is the product of three things: high-risk asset valuations (particularly in the US), a challenging fiscal/monetary/inflationary backdrop and, at best, an incoherent economic policy from the Trump administration.

Markets have probably not fallen enough to negate the first point, the second will remain in place until central banks are more confident of their success in tackling inflation versus supporting economies. These first two points we have a chance of understanding and planning for, the third – all bets are off. I suppose I take reassurance that it is becoming increasingly clear that the Trump economic team simply is not that committed to its own ill-considered policies. So far, when challenged by the markets or the polls, the administration’s response has been to fold its cards. It folded on Chinese electronics tariffs, it folded on “reciprocal” tariffs on the rest of the world, then folded on Donald Trump’s threats to fire Fed chair Jay Powell and has now folded on some of its proposed automobile industry tariffs. All of this in the face of moderate market resistance. As suggested in previous weeks, perhaps the focus here was always on China, an area the Republicans and Democrats share some shaky common ground. Can Trump stand firm here, probably not, but perhaps he will last out a little longer.

Surely Trump would have a better chance if he just focussed on China at the outset and used the support of friendly countries to back him up and apply pressure to key arteries of global trade. Instead, he has upset everyone, and friends are currently few and far between. Even his chum Jeff Bezos this week suggested Amazon would display Trump tariff costs on its website to underline the fact price rises weren’t their fault. A quick call from Trump allegedly led to a denial and turnaround from Bezos, Amazon’s co-founder, but the point remains. People aren’t happy.

Yes, negotiations are underway between the rest of the world and the US, however trust is damaged, and friendships are down the drain. Trump is pursuing his America first mentality and perhaps the rest of the world will follow and take us back to the start of the 20th century, before the first world war. That has not appeared to be the case so far, with European countries showing an initial desire to cosy up and defend themselves against America, with the UK left a little on the sidelines and trying to decide who it should remain close to – Europe or the US – can it manage both?

It does appear that the US is throwing away all the assets it needs if it is to maintain its status in the world against a power as huge, able and determined as China. “Trade wars are good and easy to win”, Trump posted in 2018. As we have written before, I can’t find any proof of this in history: trade wars hurt both sides. A deal might be reached that makes both sides better off than before. More likely, any deal will make one side better off than before and the other worse off. The latter sort of deal is, presumably, what Trump hopes will emerge: the US will win; China will lose. At the moment, the US imposes a 145 per cent tariff on Chinese imports, while China imposes a 125 per cent tariff on the US. This is not a victory, this looks like a “Mexican stand-off” that neither can win. One is given to understand that the US plan (if there is one) is to “persuade” trading partners to impose heavy barriers on imports from China in return for a favourable deal on trade (and maybe in other areas, such as security) with the US. Unfortunately, Trump is running out of friends to help him.

As with Bezos, it is not just externally that Trump faces push back. Americans have elected him for a second time and are now watching him try to transform the rule of law into an instrument of vengeance; dismantle the US government; act with contempt for the laws that are the foundation of legitimate government; attack scientific research; increase hostility towards immigrants (and not just illegal ones), even though they have been the foundations of US success in every generation. That’s before we even get to an outright rejection of the most basic ideas in the economics of trade and open contempt for the array of alliances and institutions of co-operation upon which the US-built global order rests. Let’s not get started on his equivalence or (far worse than that) preference for Vladimir Putin, over Volodymyr Zelenskyy.

The US may claim to be the most important country to global trade, but one should not forget that many significant powers already do more of their trade with China than with the US: these include Australia, Brazil, India, Indonesia, Japan and South Korea. Yes, the US is a more important export market than China for many significant countries, partly because of the trade deficits Trump complains about. But China is also a significant market for many. A “transactional” US is one always seeking a better deal. No sane country should bet its future on such a partner, especially against China.

Trump’s treatment of Canada was the defining moment. The Canadians have responded by re-electing the Liberals and our former Governor of the Bank of England Mark Carney is now in charge. Will Trump learn from this? Can a leopard change his spots? This is who he is. Moreover, breaking with China would be risky: China will not forget and is unlikely to forgive. Not least, China believes its people can bear economic pain better than Americans. Moreover, for it, the trade war is mainly a demand shock, while for the US it is mainly a supply shock. It is easier to replace lost demand than missing supply. This might be the story of the second half of the year.

It still seems likely that before the 90 days are up, Trump will at least partially retreat from his trade wars, declaring victory, while moving on in some other direction, probably tax cuts and deregulation.

Yes, the global economic order did need improvement. The case for China to shift towards consumption-led growth is overwhelming. It is clear, too, that much reform is needed within the US. Yet what is happening now is not reform, but the ruin of the foundations of US success, at home and abroad. It will be hard to reverse the damage. It will be impossible for people to forget who and what caused it. A purely transactional US will not receive the wholehearted support of its allies. The world needs a US that competes and co-operates with China. Unfortunately, Trump does not appear to believe this himself. Another U-turn would be welcome, and the sooner the better. Do have a good weekend.