Many had argued that the threat of tariffs will simply be used by President Trump as a negotiating strategy to force concessions. The deals struck with the leaders of Mexico and Canada, appear to corroborate this view. By contrast, the ‘trade war’ with China looks set to enter a new phase. Even if there is a ‘deal’ with Xi Jinping in the interim period, the bifurcation between the US and China will grow in the coming years.
With increased uncertainty around tariffs, the Fed now has an additional reason to stand pat on rates this year, given that inflation remains above target, and the labour market remains strong. Breakeven inflation rates have also been rising.
President Trump will claim a big victory and turn his attention to the EU, where he will push for higher defence spending and look to secure deals for US LNG. Indeed, it is worth noting, that while the ex-petroleum real goods deficit has been growing, the US has also been posting an ever-widening real trade surplus in petroleum, as exports have surged to record highs.
The US will secure oil & gas dominance but will also shoot itself in the foot by falling behind in renewables vis-à-vis China. Donald Trump’s actions to restrict renewable energy could inadvertently end up driving costs for consumers higher and put the grid at greater risk of outages. Tackling climate change will fall further down the list of priorities. The frequency and severity of negative supply shocks hitting economies will grow in the coming years, as the world becomes riskier and more divided.
