Trump and his Trade Tariffs

Trade tariffs are taxes imposed by a country on imported goods. They can be used to make foreign products more expensive, giving an advantage to domestic producers by making local goods comparatively cheaper. Tariffs can serve several purposes, such as protecting local industries from foreign competition, generating government revenue, or retaliating against another country’s trade practices. However, they can also lead to higher prices for consumers and potential trade wars between countries. Former-President Donald Trump has just won a second, non-consecutive term, securing the popular vote earlier this month. During his campaign for presidency, trade tariffs were often mentioned. Now that Trump has won the presidential race, we take a deep dive into the likely implications of these tariffs for the global economy (see table below).

Trump based policies include potential trade tariffs against all trade partners but we expect these are most likely to be initially focussed on China. The detail of how trade-related policies will impact economies, supply chains, and sectors, is highly dependent on the specifics of any individual trade policy. If globally traded goods become more expensive due to specific tariffs, then this will likely impact demand for these goods. This is especially the case if the US applies a universal tariff across all countries. When tariffs are lower, goods can be replaced or supply chains can be changed to use local production or other countries so the demand for these goods then often moves to other countries. This demonstrates that there are clear winners and losers from trade policies. 
 
Tariffs on imports tend to lead domestic producers to raise prices. Additionally, new investment to adjust supply chains adds to business costs. This means tariffs are likely to add to US inflation, at a time when the US economy and labour markets are already strong. It’s important to note this is a one-off impact on inflation, nevertheless, it may put pressure on The Federal Reserve (US central bank) to cut rates more slowly, or not cut rates at all, and may push US bond yields up. Higher interest rates than expected has ripple effects through economies and markets, especially in interest rate sensitive areas, e.g. real estate, consumer spending on non-essential items, etc. 

There is also likely to be an impact on currencies, where we expect these tariffs to result in a stronger US dollar. This is because tariffs may lower US spending on goods from abroad, so the US is supplying fewer dollars. If foreign demand for US assets stays high say because the US economy is doing well, it has leading technology companies, or interest rates are attractive, then the demand for dollars also stays high. Like any supply-demand market relationship, lower supply will push up the market price all else equal – in this case the US dollar. 

What could these tariffs mean for portfolios?
If Trump imposes tariffs against various countries, this type of environment may provide opportunities for active equity managers (who try to beat the market) who may look to identify the impact of these changes at a company level. Given lack of clarity on which tariffs will be imposed and when, having a globally diversified portfolio means that investors are not overly affected by tariffs or other economic impacts from one country. Holding some exposure to the US dollar can protect portfolios against global events as it tends to rally in price due to its “safe haven” status. This would also benefit the portfolio in the scenario of a stronger US dollar as a result of tariffs.

The Noise

• UK wage growth rose to 4.3% in September, recovering from a two-year low of 3.9% in August. This is +0.3% ahead of expectations and suggests resilience in the UK’s labour market. However, the broader economic picture is mixed; The unemployment rate rose to 4.3% in September, the highest level in three months and +0.2% above expectations. We should view this with some caution, as the ONS' labour survey which this data is based on has had a sharp decline in responses. Further, UK GDP stagnated in the third quarter growing only 0.1%, coming in -0.3% below expectations. The GDP figure had little to no immediate impact on markets with Sterling seeing depreciating marginally, ticking down to $1.268 per pound on Friday morning. All things considered; this creates a challenging economic environment for the BoE as it weighs future rate decisions to balance inflation control with economic growth.

• US headline inflation (CPI) ticked up to 2.6 per cent year-on-year (YoY) in October, in line with expectations, and up 0.2% from September. Also, the US core inflation rate (which excludes energy and food from inflation figures) held steady at 3.3% YoY in October, unchanged from September, and in line with market expectations. Month-on-month core CPI rose by 0.3% for the third consecutive month, suggesting that underlying inflation has not yet been fully controlled. Fed Chairman Jerome Powell has stressed that the Fed does not "guess, speculate, or assume," meaning economic data like CPI will play a key role in shaping future policy decisions. Powell indicated the Federal Reserve was in ‘no rush to cut interest rates’ in his speech on Thursday, markets on the other hand are pricing in a 62.4% chance of a quarter-point rate cut in December as of Friday. However, the longer-term inflation outlook remains uncertain. President-elect Trump’s second term will bring a raft of policies that are likely to put upward pressure on inflation, which could recalibrate the speed at which the Federal Reserve cut rates.

• COP29, the UN’s international climate conference taking place this week, has seen some climate progress. A deal has been struck to launch a multibillion-dollar carbon market governed by UN rules on carbon emissions. The idea for a carbon market originated from the 2015 Paris Agreement whereby an international carbon credit market would unlock financial flows to help reduce carbon emissions. This week’s deal included a set of guidelines outlining the eligibility criteria for carbon credits though a lot more work will need to be done before an international carbon trading market becomes viable. Other than this deal, COP29 has not seen much progress, rather it has been a platform for international party politics. Most of all, Trump’s presidential victory has been the elephant in the room (or the elephant blocking progress) in Baku, Azerbaijan.

The Numbers

The Nuance

The global cryptocurrency market has surged by approximately 30% over the past week, driven largely by Donald Trump securing a second term as US president. Digital assets like Bitcoin are not accepted as currencies in everyday transactions, you will still need your Great British Pounds to buy yourself a coffee at your local cafe. Cryptocurrencies are maintained on decentralized blockchain networks, unlike traditional currencies. These benefit from the security of centralized institutions like the Bank of England or the Federal Reserve backing Pound Sterling and the U.S. Dollar.

Despite being unregulated, crypto’s popularity over the past decade has spiked. It’s gained significant attention from non-financial figures like entrepreneur Elon Musk and actor Matt Damon. Historically, crypto has also benefited from Donald Trump’s political influence. Many investors believe his incoming policies are favourable to the crypto market. His promise to establish a “strategic national crypto stockpile” in his second term has fuelled further optimism.

Following the post-election market noise, Bitcoin in particular has reached a new all-time high of almost $93,000, pushing its market capitalization to nearly $1.8 trillion. This recent spike in value comes despite Bitcoin having no intrinsic value or asset to back its worth; it’s much more down to collective perception which speaks to its extreme volatility.

As crypto experiences this boom, the key question remains: will Bitcoin continue its rally toward $100,000, or is the crypto market due for a correction? The future of this very volatile market hinges on how Trump’s pro-crypto policies are implemented, as these have been a major driver of the recent surge in market value.