US tariffs upend global norms

US tariffs upend global norms

The Trump Administration attempt to unilaterally impose significant tariffs on global trading partners amounts to a major breach of WTO rules and a deliberate abandonment of America’s responsibilities under the global trading system that the US created.

Under the World Trade Organisation rules; countries cannot discriminate between trading partners, by giving a lower customs duty rate to one member as against another. This is known as MFN ‘most favoured nation’ and is the first article of GATT (‘General Agreement on Tariffs and Trade’). It is intended to encourage free trade, trade transparency whilst allowing developing countries special access. The WTO has effective dispute negotiation and settlement facilities where problems can be resolved.

What emerged in the Rose Garden was something entirely different. Nations were categorized by the Trump Administration individually with significant treatment divergence. This is inherently wrong as it allows the US to arbitrarily apply its own tariffs and raise barriers to entry at a whim. If this approach were legal, it would enable bullying and coercion on an ongoing basis. What is to stop Trump from changing the tariff applying to any nation on a weekly basis? The move greatly weakens the global trading system largely operating under GATT for 50 years prior to formal creation of the WTO on 1st January 1995. It will damage trust in the global trading system and the US will be seen not as a leader but as an outlier, undermining effective trade practice and norms.

Given the implication that America no longer stands for free trade, what precise structure will take its place for the rest of the world? When the USSR collapsed in 1991, its trading with countries within its former structure also collapsed. Whilst we are not looking at a collapse of the United States, what is evident is the immense partisan divide that has created highly erratic unpredictable leadership, an Imperial Rome type of problem, where at times you have a stable, normal leadership (Octavian, Claudius), then the next day Rome is in the hands of a madman (Caligula, Nero) etc.

Listening to Donald Trump’s Rose Garden speech where he fumed against ‘foreign scavengers, thieves ripping off America’ was reminiscent of the way Ugandan dictator Idi Amin ranted against the British and Indians who had been ‘milking Uganda for years’. What came across was his utter contempt against the non-US world. Since inauguration, the Trump Administration has conducted itself toward Canada, Greenland, Denmark and the EU must be taken at face value. It cannot be dismissed as theatrics or ‘playing to his base’. This behaviour damages trust and alienates other countries, many of whom resent having to accommodate American dramas on a weekly basis. How will these issues be resolved? By tantrum throwing and threats. Why would a foreign investor want to hold US assets in these circumstances.

There are moves afoot to repatriate the German government’s 1,200 MT of gold reserves held at the New York Federal Reserve. This suggests Berlin has reassessed the risks of holding gold reserves in the United States and concluded it is too high for comfort. Over 30 countries also hold gold at the New York Fed. How many others could make similar decisions with their gold reserves and/ or their US Treasury bonds?

Whilst significant US equity market dislocation normally leads to a decline in US bond yields, on this occasion the reverse has happened. This suggests significant selling of US Treasuries by central banks.

source: www.worldgovernmentbonds.com

All this begs the question about the net impact of the Trump tariffs. Whatever new cash is raised via tariffs, has to be netted off against lower corporate tax, higher yields, weaker asset prices, loss of income. Then there is protectionism itself which by reducing competitive pressures breeds inefficiency and rewards inferior goods.

Starting a trade war

Starting a trade war is a course of action with significant inherent risks. Events in Canada have proved the risk to US export performance. Canadian consumers have stopped buying American products and visiting the US. Canadian institutions are looking at divesting US assets. The Canadian tariff response does not necessarily require government enabling action, consumers have voted with their wallets and travel plans.

Canadian investors hold $3.045trn of US securities at the end of 2024 against $823.7bn in 2014. Canadian investors divested $15.6bn of US shares in January 2025 – it was the largest divestment since March 2022. However institutional divestment of listed assets can quickly accelerate.

The forthcoming Canadian elections on 28th April 2025 will be key in determining the trajectory of the Canadian response. A decisive Carney win could well lead to very muscular response and standoff.

China trade war has arrived

The US assumed the Chinese response would be generic and China would come groveling. But China has refused to negotiate on the basis of a US / China bilateral deal that would be fragile, outside WTO rules and subject to Trump’s whims. President Xi Jinping must be seen as standing up to the US, but as important is the US move is seen as an unprovoked attempt to contain and weaken China.

145% US tariffs on Chinese imports and 125% retaliatory tariffs on US imports with numerous ever changing ‘carve outs’ exempting electronics, semiconductors etc. amounts to a traditional trade war escalation. Also important was the US decision to eliminate the US$800 ‘de minimis’ threshold which exempts from duties small value items. This has effectively killed trade in goods between both countries. The likely outcome here is Chinese will stop buying US products and the US will no longer get inexpensive Chinese manufactured goods leading to inflation.

The move by the Chinese leadership to court Vietnam, Malaysia, Cambodia appears an attempt to reassure these countries that growing trade with China is in their interests. Vietnam (46% tariff), Cambodia (49%) and Malaysia (24%) are still catching their breath from the US tariffs.

The Chinese use of memes and online advertising showing overweight Americans trying to sew bras lampooning Trump’s end goals is the sort of overt psychological propaganda that can prove highly effective in undermining and de-motivating an aggressor. The use of President Reagan’s detailed speeches explaining why tariffs are wrong was also highly effective.

The US / China impasse has been described as the US ‘having the stopwatch’ but China ‘having the time’ suggesting the US setting deadlines is meaningless with respect to China (and arguably also Canada) because China will not allow itself to be scheduled or managed to a deal. This suggests a protracted standoff is more likely with the US unable to conclude a deal and hence suffering the inflationary hit.

Market share grab

Tariffs on foreign products make them expensive in the US market hence deterring US buyers from purchasing. However, this is a short-term effect. In the real world American suppliers will raise prices due to reduced competition. So tariffs reduce consumer choice and competition, they protect inferior goods and are inflationary.

It is worth remembering the reasons why some US products, do not do well abroad. They are manufactured primarily for the US consumer. Take the US auto industry, a favourite Trump gripe. US cars are long distance gas guzzlers, requiring big roads and parking spaces, they are heavy, steel intensive cars built for large people/ large families. They have limited appeal in the EU or Japan which have smaller roads, high petrol costs and environmentally conscious drivers etc. It is similar for US chlorinated chicken which fails to sell in the UK and EU and Hershey bars, popular in the US but has not caught on elsewhere.

Whilst a 90 day pause/ suspension is now underway, ostensibly to allow sufficient time for negotiation, the initial tariffs suggest a deliberate attempt at killing non-US competition. For example: –

a) Switzerland (31% tariff) suggested the US objective is to tackle imbalances due to Swiss consumer goods penetration (Nescafe, Milo, KitKat etc). US goods exports to Switzerland $25bn in 2024 dwarf Swiss imports into the US of $63.4bn. Looking at this closely, we discover Nestle 2024 US sales were CHF34bn (US$38.6bn) in 2024. Notwithstanding Nestle’s 79 manufacturing facilities and 48k employees in the US, the Nestle business was clearly being targeted by Trump. The Swiss government already has zero tariffs on 99% of US goods hence where is the negotiation precisely.

b) The UK decided to grin and bear its 10% levy. But the UK handles the defence and foreign affairs of the Falkland Islands (a UK dependent territory) which received a 42% initial tariff. The Falkland Islands has a successful frozen exotic seafood export industry that someone in America decided amounted to competition with Floridan seafood that America should no longer tolerate. This US tariff move amounts to the biggest problem faced by the Falklands since the invasion according to Liberal Democrat leader Sir Ed Davey, a man not prone to hyperbole.

c) Lesotho, (according to Trump ‘a country that no-one has heard of’) where workers sweat for $4 per day in the jeans industry and extracting and polishing diamonds. Lesotho initial 50% tariff could kill this business. Whilst a baffled Lesotho government has been summarily brought to the negotiating table – any tariff on this low margin business could kill the sector.

How is hitting some of the world’s most remote countries with already impoverished people somehow in America’s interest? Will WalMart suddenly start using more heavily unionized and expensive US labour to go out looking for diamonds or making jeans. The supporting theory is totally lacking.

The quartet of ‘dictator’ countries, Cuba, Russia, Belarus and North Korea that escaped tariffs altogether will possibly escape this tariff circus altogether. The move seems odd with respect to Russia which enjoys a $2.5bn trade surplus with the US out of a total trade of $3.5bn and the reason given that Russia has already been sanctioned was also inconsistent, given both Iran (initial 10% tariff) and Syria (initial 41% tariff) are also under a sanctions regime.

Quite apart from the lack of moral compass involved with all of this, the new approach is prone to immense corruption from the outset. It is an attempt to muzzle and bully other countries that is itself destabilizing and bad for America’s reputation.

US Fed next meeting 7th May 25

Some investors are hanging their hat on the US Federal Reserve moving the Fed funds rate quickly lower despite continuing inflationary pressures, the inflationary impact of tariffs and low unemployment. There is the famed ‘Fed put’ that will ride to the rescue of any sell off.

US March 2025 payrolls showed the US economy added 228k jobs despite cuts to the Federal government workforce. Higher employment means higher levels of aggregate demand and adds to inflationary pressures. Unemployment at 4.2% is not high.

The Federal Reserve is only likely to act if it sees significant falls in inflation (unlikely) or sharp rise in unemployment (not happened either) away from its targeted baseline. In either case, Chairman Jerome Powell is only likely to act after clear data becomes apparent, and after that data is confirmed as durable trend. The behaviour of the Federal Reserve in recent years suggests it is very unwilling to stoke inflationary pressures again by lowering interest rates prematurely.

My view is the May meeting of the Federal Reserve is a red herring in all of this. The Fed’s medicine, monetary easing, is not able to address, let alone treat, an issue of this magnitude. The Fed could act to stabilize the US Treasury bond market, if conditions worsen, however it will be unwilling to act in a manner that will be seen as underwriting a policy error.

Is it a negotiation, is it for real, will it last?

According to Donald Trump when asked on this point, not that this should be relied upon, ‘it is both a negotiation and here to stay’. Trump is a person whose vanity and need for attention, requires him to play to a global audience. The worry in this is the self-perpetuating nature of an endless round of tariff reviews.

a) Is it a negotiation? Our view is the 10% baseline will apply to many countries and hence non-negotiable. Some element of the higher tariff may be negotiable. But this will be metered out like some sort of treat. It will not be applied uniformly or within a band.

b) Is it for real? Yes the 90 day pause will buy some time only

c) Will it last? The PM of Singapore, Lawrence Wong addressed his nation and provided useful explanation also available on youtube. His speech contained the prevailing school of thought that the USA has turned a decisive corner away from free trade and globalization in a way that will disadvantage smaller countries and those reliant on traded goods as opposed to services. PM Kier Starmer and Chancellor Merrz have also alluded to an unpredictable new world and new challenges.

In many respects, Canada is the most influential of the key players due to its familiarity and proximity to the US. There are surveys showing Americans as more understanding of the range and potential costs from Canada’s possible counter measures and ‘feeling bad’ about their governments’ behaviour towards Canada.

So far most countries have preferred to negotiate rather than resort retaliatory tariffs as a first step. This helps the US to back down, should it want to, but at the same time it leaves options open.

Conclusion

In my view the tariff actions taken by the US Administration amount to a rejection of established trade rules and ‘societal’ norms governing international relations. America has always been a force for change in the world both in bringing about change, and in maintaining stability. However, its role is now being interpreted as counterproductive to global stability.

This move will be detrimental in term of US imbalances (hurting US exports more than reducing foreign imports) and damaging to the US dollar’s status as a reserve currency due to it having more unwilling holders of US assets.

Given the introduction of punitive and protectionist tariffs were last used in the 1930s, this is hard to price into the modern context. Yes, I expect global growth will slow given he self-inflicted shock to GDP growth. Capital markets are correcting and pricing mechanisms that have re-priced, in my view have done their job. I do not think the reaction is overkill leading to an oversold market. Some companies will face lower market shares, higher cost structures, Apple, Nestle for example.