“The trade war is triggering a shift that could alter the current international framework and call into question the US dollar and US Treasury’s safe-haven status.”
The uncertain reality of tariffs
President Trump has highlighted the benefits of ‘Liberation Day’ tariffs, which include: 1) rebalancing trade, 2) reindustrialising America, and 3) reducing fiscal deficits by taxing those engaged in ‘unfair’ trade practices. While these issues are undoubtedly significant, it remains uncertain whether tariffs are the appropriate mechanism to address them. In order to ascertain the effectiveness of Trump’s tariff policy, we examine the current landscape and the possible implications for financial markets.
Trade imbalances and tariffs
The relationship between trade balances and tariff rates is not straightforward. If more protectionist countries were to benefit from tariffs, one would expect to observe a positive correlation between the tariffs a country imposes and its trade balances. However, this is not the case. According to economic theory, the size of trade imbalances is more closely associated with the disparity between domestic savings and investment. Unless tariffs can significantly alter the savings and investment behaviour of Americans, the prevailing economic theory—supported by empirical evidence—indicates that the likelihood of President Trump enacting a meaningful change to the US’s trade positions is low.
You can now read the full whitepaper at the link below
