Waking up in the world of Maganomics is a restless experience. With President Donald Trump taking office last Monday as the 47th president of the United States, governments, companies and financial markets around the world will have to deal with the unpredictability of one of the most important global economic players in the near future. And if the first day of ‘Trump 2.0’ is any indication, it will be a few uncertain (economic) years.
First the good news: the barrage of presidential decrees that Trump signed on Monday did not include the immediate introduction of import tariffs. For the time being, China, Europe, Mexico and Canada are exempt from a tax on all products they export to the US. Trump had threatened several times during his campaign to protect the American economy against countries that – in his view – were stealing from America. These are countries that export more to the US than they import from it; countries that have a trade surplus with the US. The possible tariffs ranged from 20 percent for Europe to 100 percent for China.
Prior to Trump’s inauguration, various American media reported that Trump was not yet going to impose concrete tariffs. Instead, the president would begin investigations into possible improper support from China, European and other countries to certain producers, and into foreign manipulation of exchange rates to make exports cheaper. The suggestion was that this research should then lay the foundation for any subsequent targeted rates.
Dollar falls and rises
The financial markets reacted with relief to that news: the value of the dollar fell against many other currencies. Investors had apparently already taken tariffs into account on day one and had already priced in their effects on the dollar, which strengthens due to such measures. When the immediate threat of tariffs seemed to disappear, the dollar fell by a full percent against other internationally relevant currencies such as the British pound, the euro and the Chinese renminbi.
Although the decrees were not forthcoming, several of Trump’s statements stirred global markets on Monday and Tuesday. For example, from February 1, he threatened to impose a general import tariff of 25 percent on all American imports from neighboring countries Mexico and Canada. The currencies of those two countries fell 1.1 and 0.9 percent against the dollar respectively and stock markets braced, but they opened almost flat today. Apparently, waiting is the motto.
Trump also said that he wants to force Europe to buy more American oil and LNG, a wish he has expressed before. If Europe does not comply, he suggested, he will hit the continent with tariffs. “They don’t buy our cars, they don’t buy our agricultural products, they hardly buy anything,” Trump said. “And while we do purchase their cars and agricultural products, we purchase a lot from them.” Trump was referring to America’s negative trade balance compared to Europe: Europe exports 150 billion dollars more to the US than the other way around. The euro immediately fell by half a percentage point against the dollar.
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The impact of Trump’s trade tariffs will be greater in the US than in Europe or China
TikTok
It went on like this all day on Monday. There were no immediate huge import tariffs on Chinese products – but they may still come. Trump has given TikTok 75 days to become at least half an American company. If this does not happen, import tariffs will still follow on Chinese products. With this remarkable connection of matters that have little to do with each other, Trump made it clear in one fell swoop that the former real estate trader views the global economy as one big negotiating game. Tariffs can remain an instrument in the closet if arm-wrestling and threats are sufficient to extract concessions from other countries that only serve American interests. In this way he puts the principle of the functioning of free markets at stake.
Trump made it clear in one fell swoop that he views the global economy as one big negotiating game
In the Financial Times sighed economist Eric Winograd from investment company AllianceBernstein: “This kind of volatility is the new normal. Policy under the Trump administration will likely be less predictable and less process-oriented than we were used to under Biden.”
‘Alien’ profit tax
Trump was most specific about the profit tax: America is finally withdrawing from the agreement reached within the OECD on a minimum rate for this. This agreement, which 130 countries will sign in 2021 after years of negotiations, has no longer been recognized by the US since Monday. American companies that are nevertheless assessed a 15 percent profit tax abroad will be protected with specific measures, according to Trump’s decree.
This is a gesture to Trump’s American tech friends, who thus retain the space to continue shifting their profits to countries that levy less than 15 percent tax. America has accepted a global minimum profit tax of 10 percent since Trump’s first term.
Trump went one step further. In the same decree, he ordered investigations into countries that impose “alien” or “disproportionate” tax rates on American multinationals. This should lead to retaliatory measures against companies from these countries within sixty days. Trump thus indicates that he does not hesitate to tackle the national tax systems of other countries. The economic war is thus being waged on more fronts than just trade tariffs.