Whether we liked it or not, last November saw Donald J. Trump return for a second term as US president.
Initially, between election day and Trump’s inauguration, the markets liked what they thought was coming – deregulation and lower taxes.
CNBC, for example, looked at one index, the S&P 500, which had been generally rising. It stood at 5186.33 on 5 August, and by election day, 5 November, it was at 5782.76, rising to 6144.15 by 19 February. But once the issue of tariffs was mentioned it abruptly plummeted to 5521.52 on 13 March before hitting a low on 8 April of 4982.77.
In fact, anyone looking at their investments would have been shocked to see how much they’d ‘lost’ – comparatively.
Of course, the reality is that unless the world as we know it ends, markets always recover and grow. That same index was 145.30 in January 1983, 1517.68 in July 2000, and 3230.78 in December 2019.
But right now, everything is about tariffs and protectionism, and it’s not looking good.
Some think it’s all about MAGA – Make America Great Again – a phrase first coined by Ronald Reagan for his 1980 presidential campaign. A few just consider it part of President Trump’s negotiating tactics. But others worry that it’s part of a global trend of protectionism that seeks to fend off cheap and subsidised imports from China (and others) while also acting as a form of foreign policy.
And Trump is deploying such a policy with abandon. He began with 25% on all imports of steel and aluminium. He then instructed trade officials to research reciprocal tariffs for every country – taking into account VAT, trade balances and existing tariffs – the idea being to effectively reciprocate the same on their imports into the US. He’s adding tariffs to Canadian and Mexican imports and has threatened tariffs on countries that buy Venezuelan oil.
At the start of April, he applied swingeing tariffs, from 10% (UK) to 54% (China), to what looks like every country in the world. China’s tariff subsequently rose to an astronomical 145%.
These tariffs are going to be bad for US inflation and are going to hit Americans directly in the pocket. Not only will the cost of iPhones rise, but so will the cost of canned or tinned products that use imported metals. And due to reciprocal tariffs being levied on American-made goods by affected countries, some products are being returned to the US – Boeing, for example, is being handed back airliners that were destined for the Chinese market.
On top of that, some US employees will lose their jobs when the exports of their employers are impacted. Indeed, the Carnegie Endowment for International Peace (carnegieendowment.org) wrote in 2021 that Trump’s trade policies cost the US economy nearly a quarter million jobs.
The same will be true elsewhere, with the policies affecting businesses worldwide. British Steel and Tata have both recently testified before Parliament, noting that US customers are cancelling orders, but it’s going to take nine months or longer (possibly beyond Trump’s term) to increase US metal production to the point that the country is mostly self-sufficient.
Historically, in recent decades at least, there has been a trend away from protectionism with global trade and reduced barriers being favoured by governments. We had GATT (the General Agreement on Tariffs and Trade) before the WTO (World Trade Organization). And we have the EU and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which both seek to remove trade barriers.
It’s worth noting that with more trade liberalisation average global tariff rates fell. Data from Macrotrends illustrates the point – the ‘Applied, Weighted Mean, All Products’ for tariffs stood at 8.57% in 1994, 3.72% in 2004 and 2.87% in 2014 and 2.59% in 2017 (when the data stopped).
The worrying thing is that Trump could manufacture a recession – needlessly. As the saying goes, “when America sneezes, the world catches a cold”. Consequently, a Trump-made US recession could ripple out globally.
The hope is that Trump’s actions will be short-lived as the US public and its corporations apply pressure. The motor sector has done precisely this. It’s been said that a piston in a US-made internal combustion engine crosses the US/Canadian border six times, and on each occasion, the movement attracts a tariff. This has now been exempted!
And if a textbook example of how much damage can be done to a brand is needed, Tesla is one to look at. A combination of foreign competition, tariffs and its CEO – Elon Musk – being so aligned and embedded in the Trump administration has hurt. Sales have tanked, owners are wanting to sell, and its share price has dropped from $479.86 on 17 December 2024 to $221.86 (on 8 April). Musk has since said he is returning to the company.
All in all, we have to hope that common sense wins the day in Washington.