Trump trade détente chance?

Many investors went into 2025 assuming Donald Trump would use tariffs as a negotiating tool, but this belief has been shaken in recent weeks, generating significant market angst. But Mr Trump's fiscal strategy may yet lead to a benign outcome for the global economy.

- STEPHEN JEN

The Trump administration is clearly intent on targeting the US's twin deficits. The White House is seeking to address the fiscal deficit — which has risen to around 6% of GDP — by slashing government payrolls via the Department of Government Efficiency (Doge). And it’s currently trying to reduce the trade deficit through tariffs.

While Doge’s actions may initially be contractionary — potentially leading to a temporary 0.3% rise in the unemployment rate, according to my calculations — the pain should be short-lived. If the Trump administration is correct that US government spending is rife with inefficiencies, fraud and abuse, then an operation like Doge, if properly executed, ought to boost productivity over the long term, which markets should welcome.

Tariffs are a different story. Concerns about a broadening, deepening trade war have helped push down the S&P 500 by around 10% from its peak.

US financial markets are struggling to digest the open-ended trajectory of today's escalating tariff threats, and for good reason. As a reminder, tariffs implemented through the Smoot-Hawley Tariff Act of 1930 exacerbated the Great Depression.

High import tariffs might not lead to a crisis of that magnitude this time around, but they could cause a mild adverse supply-chain shock. And remember what Covid-19 did to the global supply chain, and in turn, what supply-chain disruptions did to inflation and financial markets?