Trump agenda: a question of balance

Trump’s first weeks in the White House have brought a totum revolutum of measures. Their implications, however, are difficult to quantify in economic and financial terms, as in some cases economic policy instruments (tariffs) are being used as a foreign policy tool, which makes it difficult to anticipate what final objective is being pursued and how the economic variables will react. Faced with the challenge of filtering out all the noise, the financial markets are remaining cautious, anticipating that there will be no major changes in the growth trends in the short term (deregulation and tax cuts will offset the tariffs and the impact of immigration restrictions on the labour market) and that the price to be paid in terms of inflation will be moderate. This means relying on the stabilising role of the markets themselves («bond vigilantes») and on the counterweight of the Fed, as well as on the flexibility of global supply to adapt to the new restrictions that will appear along the way. The paradox is that the changes are being led precisely by the country that has had one of the best post-pandemic economic performances, thanks to a more appropriate combination of economic policies (fiscal, monetary and industrial) than in other regions, as well as due to the positive effect of immigration on the labour market. The «new» view of trade as a zero-sum game could widen global economic and monetary divergences and unbalance the orderly landing in which the global business cycle has been immersed following the shocks of recent years.

Therefore, the main threat to the economic scenarios in the coming months is a new supply shock, this time caused by the start of a trade war, the intensity of which we cannot currently predict. What we have on the table right now is a 25-bp increase («frozen» for a month) in the tariff on US imports from Mexico and Canada, plus an additional 10 pps, already in effect, on products originating in China. The Asian country has responded in a measured manner, with a tariff of 10%-15% on energy products and vehicles, among other measures (restrictions on the trade of rare earths, etc.). In the context of the US’ negotiation strategy, logic would suggest that the tariffs imposed on Mexico and Canada are a maximum rate that can be reduced, while the contrary is true in the case of China. As we await news of the measures to be imposed on Europe and the rest of the world, if we assume that the average US tariff will rise from the current level of 2.4% to 10% (which would mark the highest they have been in over six decades), then the effect on growth would be less than 0.5 pps for the EU (five or six times more for Canada and Mexico).

Nevertheless, there remains significant uncertainty over how the tariffs will impact economic activity. After all, we must consider changes in the exchange rate, consumers’ willingness to pay more for certain products, the possibility that trade could be diverted to other geographical areas, the effects on the expectations of economic operators and, most importantly, the adoption of equivalent measures by the countries concerned. Moreover, all this is without considering the consequences of dismantling value chains as efficient as those that exist between the US, Canada and Mexico. Fewer doubts are raised about the effects on inflation, which will be clearly negative in the US and very diluted in Europe, due to the weakness of the business cycle and the global oversupply that can find an outlet in European markets. This would lead to a widening of the interest rate spread on either side of the Atlantic and the possibility of a break of parity in the dollar/euro exchange rate. Indeed, it is precisely the behaviour of the dollar and of long-term interest rates in the US that could moderate the temptation to overreact on the part of the US authorities. We must also not forget the elephant in the room, which is fiscal policy, of which little has been said so far besides a few spending cuts in federal agencies such as the one dedicated to deploying development aid. This once again highlights that the weakest link in the chain in the process of transforming the global economy will be low-income countries.

In short, we are witnessing an acceleration of the reconfiguration of the world economic order that was already underway before the pandemic and, in that transition process, we will see winners and losers. In macroeconomic terms, this adjustment process could be orderly, but it is not easy to switch from the old balances to the new ones without encountering some bumps along the road, especially when words such as cooperation, coordination or multilateralism seem disused. Perhaps it is excessive to state, like Martin Wolf, that the tariff hike will change the world, because announcements like the advances in AI achieved by DeepSeek (precisely stimulated by export restrictions) have a transformative potential that far exceeds something as old as mercantilism, but it is at least a sign of which way the winds will blow in the short term. All in all, the time has come to navigate an environment that is undergoing a transformation, subjected to much more numerous shocks, while advances in AI are spreading across the economy, enabling a jump in productivity. The key is that the adjustment must occur quickly and in a balanced way.