There is supposedly a Chinese curse along the lines of “may you live in interesting times”. “Interesting” is probably a considerable understatement when describing Donald Trump’s first six months as US president. “Full-on assaults” would best describe it: the literal (on Iran) and the metaphorical (tariffs and trade, US universities’ freedoms, the press, US overseas aid, the WHO, climate change – and indirectly, America’s standing in the world.)
Much of the economic growth of the past seventy years has been driven by globalisation. Removing or reducing trade barriers has sped up innovation and investment, reduced inflation, helped industries and countries focus on where they are the most efficient. By removing friction and ‘stickiness’, this has helped the world economy grow faster than it would.
By all logical analysis, imposing tariffs should be a bad thing. They are, after all, an indirect tax on consumers, making it more expensive for them to buy goods, rewarding less-efficient companies in the US at the expense of more efficient ones elsewhere. By introducing grit into the economic engine, and ultimately reducing growth, they ought to make business less successful and profitable, and therefore their value to suffer. But nobody seems to have told sharemarkets and investors. In the US, the S&P500 and Nasdaq both hit fresh record highs on Friday, while the Dow Jones index climbed to within a whisker of its all-time high last December.
It’s also an odd state of affairs when news of the US/EU tariff deal should be such a cause for celebration. After all, tariffs of “only” 15% on EU goods still means they’re higher than pre-Trump, and the EU has had to agree to liberalised access to the EU for things such as energy.
Part of the answer lies in the fact that the tariffs generally apply only to goods and raw materials. They don’t apply to services – which have become an increasingly-significant share of GDP. For the UK, for example, services exports accounted for 55% of total UK exports in the 12 months to February 2024. That is a key reason why the UK government was relatively sanguine a couple of months ago about the possible impact of tariffs on its exports.
Also, many US importers had built up stocks of imports before the tariffs came in, meaning their initial impact was limited.
In the medium to long term, however, most economists believe the tariffs will reduce GDP growth around the world, with the impact varying from country to country. In an analysis published last month, BBVA Research (part of the Spanish global bank BBVA) estimated that even the current level of US tariffs could reduce global gross domestic product (GDP) by between 0.2% and 0.5% per year in the short term, and significantly more over the medium term.
In the end, the impact will depend on just where the final level of tariffs lands for each country, and if it’s one thing we’ve learnt about the US president, what he says today won’t necessarily apply tomorrow if his MAGA base starts squealing. Not so much TACO (Trump Always Chickens Out) as TAMPER* (Trump Always Must Please Every Republican). Perhaps that’s why investors around the world are not spooked.
*We coined this one ourselves!