Merlin Weekly Macro: The winners and losers of Trump’s tariff game

Transactional Trump and a low handicap

Golf has long been synonymous with doing business. President Trump has been on holiday in Scotland. He has also been playing golf. He’s done a ton of business. A bagful of persuasive clubs and buggies full of bruisers sporting sunglasses, earpieces and plain suits with bulging jackets came in handy.

Ahead of his extended deadline of midnight August 1^st to agree tariff terms (that’s to say that others will agree to his terms, with the menace of his economic clubs prominently on display as an encouragement for the reluctant), things are falling neatly into place for him: the UK, holed early; Japan, South Korea, Indonesia and the Philippines, not far behind; the EU, satisfyingly sliced deliberately through the trees before being clouted via the rough onto the green, forced through gritted teeth to the pin. As we go to press, of the major counterparties tied to the August 1^st deadline, Canada, Trump’s putative 51^st State, is in the bunker: it has been served an immediate 35% (up from 25%) sanction for both failing to meet the deadline and recognising Palestine as a state. Failing to agree investment with chips, Taiwan from its own perspective runs the risk of being dealt a double or triple bogey let alone just a single. New Delhi has been served a 25% course penalty for knowingly helping blackballed Russia; still making its way round, Beijing is on its own deadline of 12 August to have reached the 18^th hole. As for the rest, 90 countries have been served with tariffs ranging from 10% for the Falklands to 41% for Syria; they get one more week to secure national agreements before the new rates are effective.

We exaggerate, of course: not all of this was negotiated on the fairways or in the 19^th hole, even though it felt like it as every staged media event in Ayrshire and Aberdeenshire or aboard Air Force One allowed Trump to announce some new initiative or take a new perspective on global events; or to give unsubtle advice to Keir Starmer how to run a major economy (i.e. not the way he is doing it).

The essence of America First

But enough of the golf analogy. As The Donald held court this week at his Scottish emporia, this was MAGA in action. Leaders came either to pay fealty (Keir Starmer) or obeisance (EU Commission president Ursula von der Leyen) as if the courses were Trump’s own crown estates despite being on foreign soil. He pulled his habitual stunt of having fawning courtiers sitting in a line at his feet, and making sure his guests were as uncomfortable as possible (notice that wherever he is, be it the White House or an otherwise empty hospitality room in a club house, and being a very big man of 6ft 3in and 244lb, or 17st 6lb, needing a very big chair to accommodate him, he ensures whomever he is granting an audience sits in an identical chair looking small and insignificant; and he barely allows them to speak; it is a deliberately demeaning psychological ploy).

As ever with Trump, nothing can be taken at face value, the sands are constantly shifting to keep everyone off-balance. The 50-day super-sanctions deadline (i.e. September 1st) announced in mid-July against Russia and those aiding and abetting Putin (including China and India) have seen it summarily foreshortened to 12 days, effectively 8th August; Trump has lost patience and demands a ceasefire. Having announced a blanket tariff on July 8^th on copper imports to the US and causing the global price to spike 15% as processors scrambled to buy forward and amass inventory against the imposition date, three weeks later he suddenly changes tack, restricting the tax to processed copper products (wires, pipes etc) but now excluding ore and unrefined raw material (the bulk of the traded tonnage) with the result that the price immediately collapsed by 22% (12% below the July 8^th pre-tariff price). Such remains his ability to make waves and to sow his own brand of chaos.

Equities: looking for ghosts?

The markets’ reactions appear confused, particularly in equities. When Trump was winding everyone up with his seemingly random walk of tariff warnings, firm announcements, retractions, adjustments, halving, doubling, picking almost whatever number came into his head at any particular moment, culminating with his package of Liberation Day retribution on April 2^nd, investors were severely rattled. A US recession loomed (rated a two thirds chance of being inevitable) presaging a significant global slowdown. From peak to trough, the broad-based US S&P500 equity index fell 19% between mid-February and early April. Four months later as we go to press and markets now rating a US recession as highly unlikely, at 6275 the index is 2% higher than it was in February testing new all-time highs. It has appreciated 6.5% year-to-date and recovered 27.6% since its low point on 8^th April. Which begs the questions: was it a fuss about nothing? Or are markets being complacent?

There is undoubtedly relief that the settlements that have been reached, with all their individual complexities and points of difference, are less than originally threatened. It could have been much, much worse. On the other hand, compared with the regimens in place in the era before Trump, new frictional costs of trading with the US have been introduced that are multiples of the pre-existing tariff rates; they cannot be ignored.

Take Japan as a good example: the newly agreed 15% tariff is above the 10% applicable during the post-Liberation Day 90-day pause period, having been threatened with 25% on April 2^nd; but the pre-Trumpian tariff levied on Japanese goods imported to the US was a mere 1.4%. Question: is it a good outcome because the rate is 40% less than it might have been, or a bad one because the cost of Japan doing business with the US has just risen more than ten-fold, adding significant frictional costs where only negligible ones were evident previously? Whichever, the market reaction on the announcement was an immediate 6% rise in the Japanese Nikkei 225 equity index.

The Financial Times and US Census Bureau estimate that the blended tariff rate on all goods imported to the US from all countries will have risen from 2.9% to 8.9% as a result of Trump’s initiatives. That is not insignificant.

One clear winner

Many will say with justification that it is bad policy to introduce unnecessary frictional costs to conducting international trade. In a Utopian world in which everyone is equal and happy to be so, tariffs would be unnecessary. But mankind is innately competitive: it is the nature of the beast. Seeking advantage or preferment is as instinctive as breathing. Tariffs or barriers to trade were invented the day that man first bartered a goat for a bushel of dried grass seed. Some are more aggressive than others prosecuting or defending their own interests.

Today, particularly in the Trumpian world of muscular politics, he is explicitly, to use his own words, wanting the US to be the “most advanced, most dynamic, and most dominant civilisation ever to exist on the face of this earth”. From his perspective, he sees the US being the winner from these new deals. MAGA is his both his political credo and legacy; everybody else has to deal with it.

What companies do in response

Certainly, there is a cost to be borne in that the taxes levied on imported goods have to be paid and it is either the importer who suffers the pain if the cost is absorbed or the consumer if it is passed on. But Trump will also point to the significant medium and long-term gains which directly benefit the US economy: the hundreds of billions-worth of dollars of foreign inward investment as America’s counterparties mitigate against the worst ravages of the tariffs by building factories in the US and having their goods stamped “Made in the USA”. It avoids the frictional drain of the tariff regime.

There are also pragmatic financial reasons for these investments: first, the currency risk is removed from the company’s balance sheet on such operations where they match local liabilities (e.g. borrowings) with local assets (land, buildings and equipment); second, on the company’s profit & loss account, the transactional risk associated with exporting which benefits sales volumes if the currency is in your favour but has the opposite effect if against, is negated; certainly, it is replaced by the risk posed by translating overseas earnings back to the company’s base currency for reporting purposes, but a skilful treasury department can mitigate that risk by using currency swaps. Bear in mind that so far this year, the US dollar has lost about 10% of its value against a basket of major currencies: a relatively strong domestic currency is simply another trade headwind, on top of the tariffs, for a country exporting to the US when the dollar is weak. Businesses dislike uncertainty; these reactions help restore stability and predictability.

However, what investors have probably not yet assimilated is that the new capital investment in the US is an urgent reaction by companies to head off an immediate problem that has been forced upon them; it is not premeditated expansionary investment, it is to protect existing market share. In what is probably a nil-sum game robbing Peter to pay Paul, investment diverted to the US is likely to be stripped from somewhere else. If the US is the winner, someone else has almost certainly lost out.

Differential deals; China unresolved

Finally, in the mix, is the differential tariff rates between US counterparties: in broad terms, 10% for the UK, 15% for Japan and the EU etc, and in some cases differential rates between products. There remain complexities and exceptions about goods including steel, cars and pharmaceuticals. Compared with Trump’s Liberation rates when differentials were pronounced, and the nominal tariffs were significantly higher than those settled upon, the risk of tariffs significantly distorting global trade flows has been reduced (there will be distortions, but not as great as they might have been).

The one big caveat with this is China. It may yet be an outlier or worse, no agreement with the US is reached and a trade war escalates as a result with obvious consequences for global trade. Such an example was seen most recently in April when US-Sino trade froze and dumping was a risk. Complicating the ongoing negotiations, China is four-square in Trump’s sights for sanction-busting in aid of Moscow.

Rationalising the market reaction, probably the best way of looking at it is this: investors have had time to adjust; their worst fears have been allayed; China remains an unresolved problem. There must still be residual anxieties that on the front line, on the competitive, commercial corporate battlefield where the practicalities of the broad, sweeping tariff strategies play out in practice, this additional element of being mucked about causes problems, more for some companies than others. The initial grind may be more onerous and frictional than expected while the new tariff regimes work their way through. Assuming nothing else changes (a naïve assumption with a mercurial and unpredictable Trump in the driving seat), within a couple of years systems and pricing will have adjusted and what we see as disruptive and inflationary factors now will simply be woven into the new fabric of how business is done. It will just be less efficient and more costly than it should have been; it potentially slows global growth but does not kill it.

Sovereignty: why throw it away?

One final parting shot. Several prominent EU leaders including Emmanuel Macron of France, Friedrich Merz of Germany and predictably Viktor Orban of Hungary have protested their disgust at the EU settlement with Trump. Rubbing salt in their wound, the UK has a ‘better’ deal. The implicit criticism of EU Commission President Ursula von der Leyen as the chief negotiator is pregnant with bitterness.

Well, friends, that’s what happens when you give up your sovereignty. In the case of trade, all EU member states have done so who are members of the Customs Union: you forego all individual rights and you delegate full responsibility to the unelected executive (the Commission is the EU’s civil service). You lose control nationally and the centralised Blob takes over.

Memo to Keir Starmer: as you insist on closer cooperation with Brussels and have already begun to bind us to it with ‘dynamic alignment’, resigning us to being a rule-taker without being a rule-setter, for which we are also paying hard cash, recognise the freedom given to you by Brexit and don’t throw it carelessly away. Even die-hard core EU members (of whom Orban is not one) have worked out the pratfalls.

Quod erat demonstrandum.

The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each.  With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.