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<\/figure>\n\n\n\nA few days ago, Trump announced the largest increase in tariffs since the 19th century and shook the foundations of the financial markets, which fear that his decision will ultimately lead to a global recession. However, the most important issues are the tectonic changes stemming from it at different levels. Let\u2019s take a closer look.<\/p>\n\n\n\n
With regard to the tariffs, first and foremost it\u2019s important to remember that they\u2019re none other than a tax that\u2019s normally levied on goods entering a country. The American administration is justifying them by claiming that they\u2019re a key tool to recovering the jobs lost in recent decades due to globalisation. They can be used to raise revenue (like all taxes), but little else. Moving a factory isn\u2019t like moving house. To begin with, it needs to be profitable; the minimum wages in the US and Bangladesh aren\u2019t the same, and the factories that return to the US will be full of robots. The relationships with the necessary suppliers need to be replicated, and there may be thousands in multiple countries. Moreover, it\u2019s a long-term decision and Trump has less than four years left. At least in theory, as long as he abides by the constitution; he recently declared that \u201cthere are solutions\u201d to allow for a third term, proof of the man\u2019s character. While the benefits, if there are any, will take years to unfold, the drawbacks are immediate. The most obvious ones take the form of a price increase across the board (not only will the prices of \u201cforeign\u201d goods rise, many of those manufactured in the US import components). Millions of Americans will have to pay higher prices for fridges (and many other items) to enable a few to work by making them.<\/p>\n\n\n\n
The temptation for other countries may be to counter-attack with tariffs on American imports, making matters even worse. Once again, a tariff makes things more expensive for the citizens of the country that imposes them. It\u2019s like being in a duel in the wild west with faulty pistols. If you pull the trigger, you shoot yourself in the foot. It doesn\u2019t matter if the other person is aiming at you before firing. It doesn\u2019t make sense for you to shoot too, as both of you will end up in hospital.<\/p>\n\n\n\n
The tariffs may just be a tactic to intimidate Trump\u2019s opponents and make them give in to his demands. In fact, in diplomacy there is the \u201cmadman theory\u201d, namely that sitting down to negotiate with someone you believe may do irrational things (because, for example, he\u2019ll harm himself) can\u2019t be an easy task, and the tendency to make concessions is greater. It fits Trump like a glove. But we don\u2019t think it\u2019s (just) a negotiating tactic, as a large number of the tariffs will remain. Out of ideological conviction, however mistaken it may be, but also because it forms an essential part of the strategy to reduce the deficit and\/or cut taxes – other electoral promises that are yet to be fulfilled.<\/p>\n\n\n\n
The markets are afraid because it could all end with a recession. It shouldn\u2019t be anything that dramatic. The starting point was really good; no major prior imbalances in the private sector, low unemployment and above-normal growth. The plane was flying high enough to withstand any jolts without crashing. The worst thing is the current uncertainty. The longer it lasts, the greater the paralysis of entrepreneurs, who won\u2019t invest (or recruit) for the time being.<\/p>\n\n\n\n
So there may be a recession, but it should be relatively mild and focused on the US. There will be tariffs that are negotiated downwards, but everyone will adapt to them in due course and they shouldn\u2019t be a major problem. What\u2019s really important is that Trump is shattering the current order and antagonising traditional allies. We\u2019ve reached a historic moment that will bring numerous changes and potentially lead to China emerging victorious and occupying part of the void that the Americans are leaving. The problem is that the current financial system is set up with the dollar as its epicentre. Every portfolio on the planet is filled with American assets, and if investors decide to rebalance them too quickly, the consequences could be very significant. We\u2019ll have to stay alert.<\/p>\n\n\n\n<\/figure>\n\n\n\n