The big geopolitical news in the second half of March has, once again, been driven by Donald Trump. With a combination of tariffs and threats President Trump has begun to reshape the economy in line with his vision of “America First”. The most discussed tariff imposition so far been on the global car market but there are other changes as well. In early April Trump plans to impose a 25% tariff on all cars imported into the US. Hard on the heels of that move, a 25% tariff will subsequently be imposed on the imports of all car parts into the US.
Car imports are a large and emotive market across the globe. Trade partners have threatened retaliation against the rumoured tariffs that have already seen major carmakers’ shares fall sharply. Japan’s PM says that all options are on the table, South Korea is discussing an emergency response (according to media reports), and France has described the US moves as “very aggressive”, suggesting that the only solution is to raise tariffs on US exports to Europe.
American exceptionalism on the wane?...
Certainly, American exceptionalism – on display for some considerable time in the run-up to the US presidential election as both the currency and the stock market raced ahead – has taken a battering from the tariff wars that have been launched. That’s been seen most clearly in the recent declines in the dollar and in equity markets. Perhaps this should have been expected (more widely certainly) as the supply of good news was beginning to run out while markets forged ahead.
Here in Hong Kong, people were discussing Wall Street and markets in cafes and taxis, perhaps a sign that change was coming (I’m sure some important investor has noted in the past that when his barber started giving him stock tips, the end was near). I’m a regular at the Mandarin Barber in Hong Kong, which does indeed offer very good haircuts, but I’ve never heard a stock tip!
…but a car crash looks to be looming
In any event, in the first quarter of this year we seem to have witnessed a rotation away from US equities and towards European and other markets. Many investors are now worrying that tariffs (their scale, their imposition or otherwise, and the general air of uncertainty that they will create) have been part of the downward pressure on American markets in the first quarter. The Dow Jones was down 2.3% in 1Q and the Nasdaq down 7.8% while the FTSE was instead up by 6.6% over the same period.
It is not all one-way of course. Many of America’s trading partners, as I note, have threatened retaliation against the US if tariffs are imposed on their car exports. Asian, European, and North American countries have put Trump on notice of possible retaliation, although the UK and Mexico are taking a softer line at the moment. Nevertheless, given the size of the global car market, cars may actually be the thing that ignites a serious trade war.
Tariffs have been weaponized against Venezuela and the buyers of its crude oil – could even Russia be next?
Trump has also moved to use tariffs as a weapon in the geopolitical war being waged. The US president’s latest salvo is against any country buying Venezuelan oil. President Trump seems to dislike the Venezuelan government and all its policies, with the US oil company Chevron forced to cease operations in Venezuela by May 27 and Trump alleging that the Venezuelans have sent planeloads of undesirables to the US. This round of tariffs risks complicating the picture as they are secondary sanctions on countries that can choose to use (or not, if the penalties are severe enough) Venezuelan crude.
The consensus appears to be that most countries will “self-sanction” to avoid the secondary tariffs being imposed – although it is impossible to predict what will happen with the first round of sanctions. There has been a lot of volatility in the sanctions process itself, in the rumours of sanctions and the impact of sanctions. China and India are major buyers of Venezuelan oil and could, theoretically, fall foul of the rules if they continued buying as much Venezuelan oil as they normally do. Trump has even threatened secondary sanctions on Russia if Vladimir Putin doesn’t get moving on resolving the Ukraine conflict.
Assuming that countries like China and India avoid breaching the new sanctions linked to Venezuelan oil by reducing purchases, then there is likely to be less Venezuelan oil overall coming to the market. It is quite possible that this will prompt higher global oil prices and contribute to inflation – likely the exact opposite of what President Trump is out to achieve with his sanctions.
Tariff reality
The promised Trump Tariffs duly arrived on 2 April, so are no longer on the watchlist since they’re now here and we are all digesting them.
President Trump went on live television brandishing a large signboard illustrating the level of tariffs to be henceforth applied to each country. In principle, there is a 10% tariff across almost every country. However, there are higher reciprocal duties for many of those countries depending on a) whether they are in or out of favour, and b) which of America’s largest trading partners President Trump decides has “ripped off” America over a long period.
China is treated relatively harshly, with tariffs of 54% now applied to its exports to the US. The FT has reported that the effective tariff rate for exports to the US will rise from 2.4% to a possible 20-29%, the highest rate in a century. One country that came out of it reasonably well is the UK –not a country that has covered itself in economic glory in recent years, but a strategic partner of the US. Prime Minister Starmer managed to secure a 10% tariff rate for the UK, while big rivals the EU face tariffs of 20%.
That was Liberation Day as far as Trump was concerned. Now we await Retaliation Day.
Military developments
Much has been written about the impact on Europe of a US military withdrawal from the world, which has long relied on the US for its overall security. Questions are raised as to whether Europe can actually defend itself from an expansionist power – although the most expansionist power these days appears to be Trump’s America, seeking as it does to take over Canada and make it the 51st US state, acquire Greenland (“we need it”), and secure Ukraine’s mineral wealth for itself in return for past military support from the United States.
Less widely discussed – publicly anyway – is what happens here in Asia. The major American allies in Asia are Japan, South Korea and Taiwan, with the first two linked by treaties with the US. It is widely assumed that the United States would step in to help defend Taiwan in the event of a Chinese attack – although the latter assumption was rooted in the concept of “strategic ambiguity”. The situation in Asia remains ambiguous to a large degree, but the increased ambiguity about US support has Washington’s erstwhile Asian allies looking quietly around for more certainty in a now-uncertain world.
That could mean making greater accommodation for China’s position in Asia. US Defence Secretary Hegseth has said that the US is not going anywhere and there seems no question from President Trump’s public statements that he sees the challenge from China eclipsing all others that the US may face. “America First but not America alone” is the watchword when it comes to allies in Asia – although Hegseth skipped visiting Seoul on this visit which must have disconcerted South Korea, a country which was recently the site of an abortive coup by President Yoon Suk Yeol.
An ”economic emergency being created”
The tariffs have been described by several external commentators as an economic emergency. There is no doubt that they are – and an entirely self-inflicted one.
The tariffs reduce household income and may prompt retaliation from America’s trade partners. Even if one of Trump’s aims are achieved (raising cash for tax cuts), cutting the income of workers is hardly a suitable solution. The ‘reciprocal’ tariffs appear to have been calculated through an odd mathematical formula, calling their accuracy into question. Perhaps all the economists were let go when Musk was put in charge of DOGE – certainly they appear to have been absent when these important decisions were being made.
Having been told by Defence Secretary Hegseth that the US is not going anywhere, it is no longer a cost-free option for US allies in the Indo-Pacific – President Trump wants more from them. He noted recently that while the US is obligated by treaty to defend Japan, Japan is not similarly obligated to defend the US, indicating perhaps that he wants to see that “unequal” position change. Hard power support from its regional allies is now the order of the day and those American allies are also going to have to contribute more to their own defence. That may be as straightforward as spending more on overall defence; the US Undersecretary for Defence has already said that Japan should raise its defence expenditure from the current 2% of GDP to 3% of GDP, while President Trump has talked of 5% of GDP.
Looking ahead – four things to watch out for
Trump’s Tariffs were unveiled on April 2nd, so there’s no need to look forward to them – they are already with us. On the geopolitical front, they are the major risk facing markets in my view, with sanctions coming but with little detail on any anticipated response.
#1 on the watchlist is to watch out for progress (or lack of it) on a ceasefire between Russia and Ukraine, which Donald Trump has been pressing for but which Vladimir Putin has been slow-walking. Trump appears to be getting annoyed at Putin’s lack of enthusiasm for winding down the conflict – because that wasn’t in the script, I imagine. To be fair, if you were Putin, you’d probably be surprised to find yourself being berated by Trump for not moving quickly enough to strengthen your position, given the pass that Trump has already handed Russia over its invasion of Ukraine. Putin must have assumed that he had an indefinite free hand in Ukraine and had talked of replacing Zelenskyy through elections, with the suggestion being that Zelenskyy was illegitimate (this from a chap who has now ruled Russia for 25 years. That’s a quarter of a century – almost as long as Josef Stalin). Trump’s patience appears limited with those standing in his way – whoever they are.
Nevertheless, with his eyes on a possible Nobel Peace Prize (?), who knows what’s going through Trump’s mind.
One of the president’s bugbears was the fact that ‘China controlled the Panama Canal’ and he wanted it back – #2 on the watchlist. In fact, the reality is that CK Hutchinson, owned by Hong Kong’s richest man Li Ka-Shing, owns and operates ports at both ends of the canal in the independent country of Panama. That was enough for Trump, though, and he set his mind to bringing the canal under ‘American control’ through Blackrock buying a controlling stake. That seemed fine until China (and others) stepped in and decided that its regulators should also look at the deal and that no deal would be signed imminently – is this China not wanting to challenge Trump directly, or China biding its time?
Turkey is rising up the list of unstable and concerning places all of a sudden, #3 on the watchlist. There’s an election coming, in which current President Recep Tayyip Erdogan is standing, having been in power for 22 years. With large demonstrations occurring each day in Istanbul, his main rival, described as “the hope of millions” was arrested and jailed around two weeks ago while journalists have been arrested, detained and, if you’re the BBC, deported. A major economy, a NATO member, an EU candidate and an unstable corner of the world – certainly one to watch over the next few weeks.
#4 on the watchlist this week? Inevitably…tariff retaliation by those that Donald Trump targeted with increased tariffs who now have to decide what to do about their own sanctions against America. The larger and more powerful the economy, the more likely we are to see retaliation and the potential for a global trade war to begin if cooler heads do not prevail.
#4 on this week’s watchlist will almost certainly be #1 on next week’s watchlist as we watch the trade war expand. Last night HK’s Hang Seng was down 2.2%, Japan’s Nikkei 3.3% while the Dow, Nasdaq and the S&P were all up 0.6-0.8%. China’s CSI300 was down 0.8%, reflecting its size and stronger position in the global economy.
On a flight…this is when the seatbelt sign lights up.
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.
