Trumpocalypse: The four horsemen of trade disruption

An investing Rip Van Winkle who went to sleep on April 1 and woke up now, would not realise the world had seen the biggest shock to global trade since WW2. Equity markets, including in the US, have recovered losses incurred in the week after April 2 - Trump's 'Liberation Day'. US bond markets, which also initially struggled to cope with the spike in uncertainty, have stabilised, too.

This rebound has occurred even as it's becoming evident that there was a sharp fall in US-China trade through April, a visible increase in US retail prices, and early signs of a global slowdown. Markets appear to be extrapolating the progressive US pullback from disruptive policies - first the 90-day pause on tariffs in response to bond market turbulence, and then the about-turn on China: from a combative escalation of tariffs, to a willingness to negotiate, apparently after US retailers warned of empty shelves in two months, culminating in a reduction in duties on China to 30% (from 145%) for 90 days on Sunday.

Some now doubt the strength of the US resolve to withstand economic pain. Can the risk of 'fewer dolls this Christmas' force US import duties down to pre-April levels? That would be going too far.


Even if a 'grand strategy' is lacking, and daily announcements seem chaotic - like a proposed 100% tariff on movies made outside the US - Trump 2.0's actions and interviews of POTUS and his senior cabinet colleagues point to 4 underlying 'grand objectives':

Political
Despite a near-doubling of per-capita GDP in the last four decades (in real terms), median real wage has barely grown. This means that nearly half of the US population has not seen much improvement in their quality of life despite the US GDP growing 2.6x in real terms and 6.4x in nominal terms. While life expectancy of a White male American who's a graduate has risen to 84 years, that of the average White male American has fallen back to 73-74 of several decades ago.

We can debate whether a revival of US manufacturing is the best solution for this problem. But the political forces unleashed are real, and Trump 2.0 draws its support from this base.

National security
If an economy with per-capita GDP exceeding $85,000 wanting to make penicillin and steel was not enough, the use of FDR's phrase 'arsenal of democracy' by a key Trump adviser to justify 25% tariffs on autos dispelled any remaining doubts. In a 1940 speech, FDR promised military supplies to Britain to fight Nazi Germany, using the 'arsenal of democracy' - effectively, among other things, making a 1,000x jump in production of fighter aircraft. The claim, inviting much derision initially, became reality in 1943. Given China's ascendance, the US may be replenishing capabilities for a hot war, even if only as a deterrent.

International monetary reorder
The country behind the global reserve currency must run a current-account deficit (CAD). Only then can foreign entities accumulate assets in the dollar. Over several decades of running a CAD, accumulated deficits become so large that the currency may become unsafe to hold.

In December 2024, the US owed the world $62 tn, and owned only $34 tn foreign assets, resulting in a negative net international investment position (NIIP) of $28 tn, 90% of its GDP.

Such resets have occurred in the past. Current real-effective-exchange rate (REER) of the dollar is at high levels last seen in 1971 and 1985, following which it had fallen in value by 30-35% over 3-8 years. A deliberate devaluation of the dollar is effectively a default and, thus, needs negotiation.

That most of the US' international liabilities are with its allies - Europe, North Asia (Japan, Taiwan, South Korea) and West Asia - is perhaps why even allies were subjected to reciprocal tariffs. If their currencies appreciate against the dollar, US' NIIP would be less negative, as foreign assets get marked up in dollars. The recent sharp appreciation in the Taiwanese dollar shows some allies may already be adjusting.

Revenue-building
A somewhat minor objective is to earn fiscal revenue from import duties and use it to finance tax cuts Trump 2.0 promised during the election campaign.

It's important to remember these objectives, as the contentious process of trade negotiations unravels. Is it possible that we are finding grand objectives where there are none? That there is no method underlying the madness?

Absence of a clear approach isn't surprising. At turning points like these, and for large and complex problems, the regime knows what does not work, even if it does not know what will. For example, while the 1971 and 1985 devaluations involved mostly the Japanese yen and Deutsche mark, no solution would be possible today without China.

Trump 2.0 appears to be calibrating the pace of change, using financial markets as leading indicators to minimise unintended consequences. Major objectives being non-economic in nature, some short-term economic pain is likely unavoidable. Further, it may be many months, if not years, before contours of the new system begin to emerge. Prolonged period of economic uncertainty itself is likely to be a headwind to global growth.