Has Trump pulled off an amazing deal, or is the worst yet to come?

Times

3 days ago

The Trump administration's flurry of eleventh-hour tariff agreements will raise US protectionism to the highest level in a century. The effective tariff applied on goods entering America will jump from an average of just above 2 per cent at the start of the year to around 18 per cent, according to the Yale Budget Lab.
Before its August 1 deadline, the White House signed off tariff agreements that will apply a basic 15 per cent tariffs on goods from the European Union, Japan and South Korea, a higher 35 per cent rate on some Canadian goods, and 39 per cent rate on Switzerland.
The UK will be subject to a 10 per cent minimum, while scores of other countries — around 70 — that failed to agree new terms will fall back on the 'reciprocal' levies announced in April.
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The expiry of President Trump's deadline marks an unprecedented four months of upheaval in the global economy, where the world's economic superpower has picked apart the rules of globalisation through daily threats of punishing import taxes, de facto capital controls, and financial sanctions on its trading partners.
Yet for all the noise about what Trump will announce or un-announce on the rest of the world, the US and global economy enter August in a position not too dissimilar from where they started before Trump's 'liberation day' taxes were unleashed in April.
The US economy and labour market have not been plunged into recession, interest rates continue to fall in most advanced economies, and equity markets have reversed their April wobbles to touch record highs in the US, UK, and Europe.
This relatively benign outcome has led some to conclude that Trump has won the first battle in his trade war: the US is dismantling the global trading system and dictating humiliating terms to its erstwhile allies with minimum damage to its economy or financial stability so far.
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To add to the euphoria, the effective 18 per cent tariff rate on the rest of the world will generate around $450-500 billion in federal tax revenues for Trump — worth more than 1.25 per cent of the US economy and significant source of fiscal relief in a country where the budget deficit was on course to stick at 7 per cent of GDP.
'The US has emerged as a clear winner in the trade war at this juncture,' Mark Dowding, chief investment officer at RBC BlueBay Asset Management, said. 'There is a feeling that Trump has extracted pretty much every concession he would have hoped for in the trade negotiations conducted to date. In the absence of material retaliatory tariffs, this has been viewed as a great result for the US.'
Dowding added that then 'worries that Trump was undermining US policy credibility have been replaced by a grudging sense of respect for the negotiator-in-chief'.
This reassessment is best reflected in the value of the dollar which is heading for its strongest week in three years. The US currency, which has been the chosen market proxy for worries about US policy credibility, has recovered 1.5 per cent from the trough hit at the end of June. The greenback remains around 9 per cent weaker against major currencies this year and is still having its worst year since the dollar became a free-floating currency liberated from gold in 1972.
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The performance of the US stock market has been even more striking. After the worst start to a new presidency in a century, US equities have outperformed all main peers since April 21, reflecting the 'Goldilocks' state of an economy that is 'not too hot, and not too cold', Will Denyer at Gavekal Research said.
Trump's tariffs strategy has been emboldened by 'hard' economic data this week which showed the US the economy bounced back strongly with a 3 per cent annualised GDP expansion in the second quarter, after a 0.5 per cent contraction at the start of the year. Signs of tariff-induced inflation are also scarcely showing up in monthly price data, and while the labour market is slowing, demand for workers remains far above historical averages. The tariffs deadline also coincided with another bumper week of corporate earnings for American tech and AI giants that has charged up US market bulls.
It's not just investors who are relieved at the state of the world at the start of August. The International Monetary Fund this week gave modest growth upgrades to most developing world economies, including the US, acknowledging that after the burst of tariff fears, the probable landing spot for American protectionism is likely to be lower than first feared. Even the US Federal Reserve, the country's beleaguered central bank, is inclined to think that tariffs are likely to have a one-time impact on raising American consumer prices, rather than marking the start of a new burst of inflation that triggers higher wages.
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Outside the US, growth forecasts for big economies that capitulated to Trump's demands are not being revised down drastically. The EU economy could still outperform forecasts as Germany's mass spending counteracts part of the hit from Trump's trade war. Goldman Sachs this week revised up Europe's GDP projections by 0.1 percentage points to 1.2 per cent this year and 1.3 per cent in 2025, after the bloc agreed to a broad 15 per cent tariff rate that will initially cover pharmaceuticals.
Economists, however, are still divided over whether the resilience of the US and world economy means the tariff pain has simply been delayed, or whether there are other factors at play that will lead to an altogether more benign outcome for America and its trading partners.
The widely held assumption among most forecasters is still that American households and businesses will suffer the brunt of higher import taxes, supply chain disruption, and the frozen investment as a result of the barrage of protectionism. On the flip side, the White House points to the 2018 tariffs episode as 'proof' that levies have no lasting effect on consumer prices and they did not prevent the US becoming the fastest growing economy in the G7 for the past two years.
Freya Beamish, chief economist at TS Lombard, thinks market exuberance will come to a halt as US 'data over the next six months will be a rude awakening'.
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'Inflation dynamics are deteriorating. Right now, it's as if the market actually believes that tariffs are going to be paid by the rest of the world and that Trump has pulled off some amazing deal. We've heard hitherto serious economists making such claims and can only assume they have taken leave of their senses. Unfortunately, the stock market reaction is likely to embolden the administration into further damaging policy moves,' she said.
Looking ahead, few trade experts or diplomats expect Trump to stick to his word on his set tariff rates as the likes of the EU and Japan have been bounced into making investment pledges — like buying fanciful amounts of US energy — that they simply cannot meet. Even more worryingly, the president has shown he is willing to use the tariff stick against countries over any policy disagreements — over security, foreign policy, and in the case of Brazil, domestic court procedures against a former president.
'These are very high level deals that have been announced. A lot of work is going to have to go into filling the blanks,' Pierre-Olivier Gourinchas, chief economist at the IMF, warned.