This week’s look at geopolitics has, once again, a very domestic feel to it. This has been the era of tariffs moving centre stage as part of President Donald Trump’s efforts to reset the economic relationship between the United States on one hand and China, the EU and other large economies on the other. How successful this will be, and what collateral damage might emerge in its wake, only time will tell. President Trump has started a trade war with all of America’s trading partners at once and disrupted supply chains globally as he seeks to refashion world trade to work better for the United States.
On 2 April, President Trump announced a range of tariffs effective from 5 April, arguing that they would allow the US to improve its economy while protecting domestic jobs, particularly those in the manufacturing sector. The main tariffs are set out below, although there are specific rules for particular sectors, like cars, metals, pharmaceuticals etc. Most of the tariffs are currently subject to a 90-day pause with only China’s being implemented at the moment.
10% for all...
There is a baseline tariff of 10% on pretty much everything imported into the United States, with countries as disparate as the UK, Saudi Arabia and El Salvador being entitled to this lowest level of tariffs. The tariff is paid to the US government and is almost certain to be passed on to consumers by anyone that imports into the United States.
…higher for many (the “worst offenders”)
Beyond this minimum level of tariffs, further tariffs are being imposed on seven countries that have restricted in some way the sale of US goods in their country. Here are found the EU (20%), Taiwan (32%) and Japan (24%) as well as a range of other countries that have fallen foul of America’s perception of being taken advantage of by its trading partners.
China faces some of the heaviest charges, with a total tariff of 145% imposed from 9 April. In response to the US imposition of tariffs, China has itself imposed tariffs of 125% (rather than the current 34%) on US goods entering the country. In effect neither side can trade with the other. Markets responded by falling sharply given that the tariffs imposed are, in some cases, tougher than those set in the 1930s. China appears to be the main target of the new tariffs – although many other countries will end up paying tariffs as part of this process. With a flight to safety underway, bond prices rose and yields declined (to less than 4%) while the Fed is already warning that inflation is likely to reach 4%. Not good for borrowing costs or investment and caused by the selloff in equities and the US dollar.
The rhetoric around the new tariffs was also quite strident, with Trump’s son Eric noting that he would “not want to be the last person in the queue trying to negotiate a trade deal” with his father and suggesting that countries should come forward to offer pre-emptive concessions to the US.
Retaliation has been limited so far…
There has been only limited retaliation, with China taking the hardest line. Most countries, seeing even very closely-allied nations like Israel and Taiwan being hit with tariffs have opted to remain quiet and work behind the scenes to seek lower tariffs or exemptions from some of the tariffs being discussed which do get imposed.
…but even now the losers are appearing
Countries which have in recent years become manufacturing hubs in Asia were hard hit by the tariffs, including Vietnam, Taiwan and Thailand. Several Asian countries have developed their manufacturing sectors to provide an alternative source of supply to western multinationals, which had previously depended solely or principally on China as a manufacturing base, partially as a result of earlier US-imposed sanctions on the region. With tariffs of 46% imposed on Vietnam and 36% on Thailand, life has just become tougher for these backup providers of manufactured goods to western markets.
China, too, is affected… but has retaliated with its own tariffs
While China has sought to diversify its manufacturing through its companies locating in alternative manufacturing centres, such as Vietnam, these new tariffs could make that option less attractive for Chinese investment. Vietnam and Thailand may end up being subject to higher tariffs than China depending on decisions being made in Washington.
Tariffs are easy to impose but slow to be removed…
Tariffs have in the past been easy to impose but hard to remove. If there was a phrase that characterised the latest disruption to markets, I’d suggest “the Smoot-Hawley Act” of 1930 should be it. I was unfamiliar with the details of it until recently, but the legislation is thought by many to have made the Great Depression tougher than it would have otherwise been.
…as we head back to the 1910s
The FT calculates that President Trump’s tariffs will take us back to the tariff levels of 1909. With global trade representing a much greater share of economic activity than in the early 20th century, the challenge from the imposition of tariffs by a major trading nation is commensurately greater. Calls to use tariffs as a starting point for negotiations and seek a compromise with counterparties – which would be less disruptive – have seemingly fallen on deaf ears. There is an economic argument for tariffs, in that the protection from imports can enable new products – or even new industries – to develop and become viable in their own right. However, tariffs are also popular with voters, persuaded – rightly or wrongly – that they are a cost-free source of revenue for cash-strapped governments. We should remember that, generally, there’s no such thing as a free lunch – someone is paying the bill.
Voters like tariffs, business won’t discuss them
Having said that tariffs are popular with voters, talking about them seems to be remarkably unpopular among senior business executives. They are keen to lobby behind the scenes for exemptions and changes in rates, but not comfortable with outright opposition to the new government’s policies. This point is reinforced by the pressure on a series of law firms, who will now carry out pro-bono legal work for the new administration. On April 7th in Asia, we woke up to a 13% decline in the Hang Seng, the largest one-day fall in almost 30 years. I suspect that many investors were less than happy about the arrival of tariffs, given the performance of the markets on April 7th (and later).
Experienced commentators noted that the principal cause of the decline was domestic US policy. With tariffs set to rise to historically high levels, Main Street as well as Wall Street is likely to be affected. Apart from retaliating on tariff levels, China fixed the renminbi at a weaker level, suggesting that devaluation could be one of the levers in its arsenal to respond to the US trade war. That would introduce the risk of competitive devaluations around the world as other countries sought to protect their position. It is currently unclear whether a devaluation – even a modest one – might happen, or if these movements are just signals to other market participants over China’s concerns about the current state of markets and US policy.
Difficult choices for the Fed
The Fed is left with difficult decisions to make – torn between controlling inflation and encouraging growth. It appears as if rate cuts might just have the edge at the time of writing despite concerns about the resurgence of inflation, principally because of the market dislocation created by the imposition of tariffs – although concerns about the longer-term path of inflation remain at the forefront of many economists’ thinking. What was thought likely to be three cuts in 2025 is now being talked of as four to five cuts, with Trump himself demanding publicly that the cuts start sooner rather than later.
Consensus seems to agree that a trade war is a bad idea… but it also seems to be coming
The consensus among many commentators seems to be that the new US tariff policy is a negative for both the US and the global economy. However, there was no equivocation in candidate Trump’s speeches about his future plans, he made it clear whenever he was asked about it that a trade war was coming and that the targets would be those countries (seemingly almost everyone in the world) that had historically “ripped off” America in the past. So far, retaliation for the tariffs imposed appears to be limited, a sensible move on the part of most governments. While this is all going on, there are commentators highlighting the economic danger we currently face. Of course, there are also commentators on the other side of the fence highlighting that this is a big moment for America, that the country was not a charity, that it had in the past been taken advantage of but that this was now coming to an end.
In other developments, the US’ steady withdrawal from the Russia-Ukraine war continues
US troops are set to withdraw from the Jasionka base in Poland which has been one of the key supply routes for arms and ammunition reaching Ukrainian forces. This marks another step in the direction of the US exiting its security guarantees for Europe under President Trump. One day after another Russian attack on Ukraine, this time on Sumy, Trump again blames Volodymyr Zelenskyy for starting the war.
Fewer visitors to the US as Canadians (and Europeans) go elsewhere
With President Trump expressing interest in making Canada the 51st state of the US, Canadians – normally big visitors to the US – are looking elsewhere for their vacations. While fewer Canadians may not move the needle much, if more populous nations, such as those in Europe, continue to decide that the US is too difficult a place to visit, that could be significant for tourism earnings, a sector that represents 2.5% of US GDP.
Continued turmoil in South Korea as President Yoon Suk Yeol is officially removed from office
Seoul’s Constitutional Court upheld the parliamentary vote to remove Yoon on the grounds that he had exceeded his authority by imposing martial law. He was subsequently suspended from office, which the Constitutional Court has now upheld. His likely successor is a left-wing lawyer from the Democratic party.
Falling oil prices may dent Russia’s ability to wage war in Ukraine
Oil prices have fallen as a result of the US tariffs, reaching a level not seen for almost two years and causing problems for the Russian budget, a problem compounded by expectations of slower future growth and the prospect of a trade war. Even the normally urbane Dmitri Peskov, the Kremlin spokesman, seemed a little stressed when commenting on the oil price falls, as did the CBR Governor, although realistically it will take quite a while for the slowdown in revenues to pass through the system. Nevertheless, the country’s sovereign wealth fund has shrunk by two-thirds in the last five years, which is likely to act as a constraint in the future.
This article has been approved by Tideway Investment Partners LLP; however, the views and opinions expressed in the article are not necessarily the views and opinions of Tideway.
The content of this document is for information purposes only and should not be construed as financial advice. We always recommend that you seek professional regulated financial advice before investing.
About the Author
Stephen O’Sullivan was an ‘anchor’ client at the founding of Tideway and has been a client of James Baxter since 1999.
Stephen studied economics at university and then joined the oil industry – working for BP in their refining and marketing business as an oil trader and then with Total in the corporate planning team for their upstream business. In 1989 he joined Coopers & Lybrand’s strategy practice for oil and gas and, with the end of the Cold War, he worked extensively as a consultant across the oil and gas industry in Eastern Europe, Russia and the other post-Soviet states as well as China, the Middle East and Southern Africa.
In 1995 he joined a start-up investment bank, MC Securities, specialising in Eastern Europe and Russia where he was the Head of Research and the Head of Oil & Gas Research. His team was ranked the #1 oil & gas research team across EMEA and the #1 overall research team for Emerging Europe and Russia for the next three years. They sold the bank to JP Morgan in 1998 and Stephen relocated to Moscow to become Head of Research and a partner in UFG, the leading independent investment bank in Russia. His team were ranked the number one oil & gas research team and the number one Russia country team for nine years in a row.
After the sale of UFG to Deutsche Bank in 2005, Stephen became Head of EMEA and Latin American research for DB where the team was ranked #1 across all industry sectors, in both strategy and in economics, in country research for Russia and South Africa and across the entire EMEA region in 2006 and 2007. In 2007 he left Moscow and moved to Hong Kong as Head of Asian Research for Australia’s Macquarie Bank. In 2009 he joined Barclays Capital in Hong Kong to lead the buildout of the bank’s Asia ex-Japan research business.
Since 2013 he has been an investor in a range of businesses in technology, real estate, retail and materials while living in Hong Kong. His major interests include China’s gas sector reform, China’s nuclear renaissance and the country’s global impact on energy markets. While based in Hong Kong he has also been a Senior Visiting Research Fellow at the Oxford Institute for Energy Studies, the world’s #1 ranked energy think-tank where he published several major studies of the Chinese energy sector. He is a contributing author to several international think tanks on global energy issues and has advised international law firms on the oil and gas sector globally.
