Macro & Oil Report: The trade war waged by the United States

The Trade war waged by the United States: decryption, analysis, and forecasts

Since the beginning of April, the global economic landscape has been significantly impacted by the trade war initiated by the United States. Dubbed “Liberation Day” by Donald Trump, 2nd April marked the announcement of reciprocal tariffs aimed at addressing alleged decades of global plundering. This article delves into the key events, reactions, and potential future implications of this trade war.

The reciprocal tariffs

On 2nd April, Donald Trump announced a series of tariffs as a response to the trade deficits the United States has with many of its trading partners, particularly China and the European Union. These tariffs were much higher than expected, with a minimum of 10% for all countries and significantly higher rates for around 60 countries. The tariffs were presented as a result of a calculation combining customs duties, exchange rate manipulation, and regulatory barriers. But the method of calculating these tariffs was quickly discovered to be based on the ratio between the surplus generated by these countries with the US and their exports to the US. This revealed that the tariffs were not intended to re-establish fair competitive conditions but to erase the deficits. The high rates were meant to lead everyone to negotiate with the US and make concessions, particularly to commit to buying more American products. This announcement caused astonishment due to the high rates and the impact on poor countries with minimal surpluses with the United States. It was also unanimously criticised, even by some Republican politicians and US business circles, who anticipated a sharp rise in their production costs.

The plan behind the tariffs

For weeks, there had been talk of a plan theorised by Trump’s chief economic adviser, Stephen Miran, which involved the imposition of prohibitive tariffs. The plan aimed to lower the dollar without scaring off investors, who must continue to finance US public deficits. This was to be achieved by putting double pressure on other countries through customs tariffs and threats to stop US military aid. This plan has been referred to as the Mar-A-Lago Agreement in reference to Donald Trump’s Florida residence and the 1985 Plaza agreements aimed at lowering the dollar. After exerting this pressure, the United States would force other countries to lower the dollar and at the same time exchange their claims on the US Treasury for very long-term debt (there was talk of 100-year bonds) with very low interest rates, a kind of perpetual zero-interest debt. However, most economists disagree with Miran’s theory linking US deficits to the value of the dollar. The root cause of US external deficits is the domestic imbalance between savings and investment. A public deficit of 7% in a situation of full employment is unprecedented.

Things did not go as planned

The measures were perceived negatively for the US economy, leading to a drop in consumer confidence and soaring inflation expectations. The plan seems to have gone off the rails, with less growth and more risks leading to a loss of confidence in US assets. The equity markets fell sharply, but US Treasury bonds and the dollar did not play their traditional role as safe havens. Quite the contrary, in fact, since in the days following the announcement of reciprocal tariffs, the yield on 10-year Treasury bonds rose by 60 basis points (meaning that their price fell) and the EUR/USD exchange rate rose to 1.14. It was at 1.02 in January.

Under pressure from the markets and various stakeholders, Trump announced a three-month pause on all tariffs above 10% except for Chinese products for which it has instead increased tariffs up to 145%. Then there was the announcement of the exemption for imports of mobile phones and computers, most of which are made in China.

The global repercussions

The trade war’s impact is not limited to the United States. China and other Asian countries, as well as Europe, are also negatively affected. The initial feedback on the negotiations with the EU is not good, with Europe only offering to buy more American LNG. China is demanding respect and does not want to appear to give in to Trump’s injunctions. The trade war has significant implications for global growth prospects, with the US economy’s growth rate potentially falling to 0.5% and China’s to 3.5% by 2026. As for Europe, it would lose the benefit of the German recovery and the increase in defence spending. Overall, global growth could lose about one percentage point compared to previous years, to around 2.25%-2.5%. That’s huge. In the longer term, there will be a lasting negative impact on confidence and therefore on investment.

Conclusion

The trade war initiated by the United States will have far-reaching consequences, both domestically and globally. While the tariffs were intended to address trade deficits and re-establish competitive conditions, they could push the US economy into recession and have led to a loss of confidence among foreign investors in US assets. The global economy will also be affected, with very negative implications for growth prospects. The escalation of tensions between the US and China is particularly worrying.