Merlin Weekly Macro: Trump and the new world disorder

A late Easter and almost exactly three months since Donald Trump took office. It is an apposite time to stand back, catch a breath, and take stock. To say it has been a topsy-turvy period in the year to date would be an understatement. Every US President has targets for their first hundred days. They want to make a splash. Trump began throwing boulders on Day One and 87 days on, the large splashes continue to rock boats worldwide.

It was Wolfgang Schauble, the former German finance minister, who memorably said when Trump was elected in 2016 for his first term, “the world is still turning, it’s just got a little crazier”. And that is a very good point from which to start and to keep things in perspective: moorings have shifted in many respects (but not all), some things are distinctly crazier, but the world is still turning.

Trade: sand in the wheel bearings

Trade is most obviously in flux. It has been almost impossible to keep abreast of Trump’s Tariff Tirade: imposed, repealed; doubled, halved; national, sector specific; non-negotiable, negotiable; permanent, paused. Nailing jelly to a wall is easier than keeping up with every twist and turn emanating from the fireside of the Oval Office or Trump’s Twitter feed. The fact that members of the US administration are indulging in open internecine warfare about the wisdom of the trade strategy only adds to the tension and unpredictability and leaves the markets clutching at straws.

The President can self-evidently tie himself in knots. Consider the 25% national tariffs he applied to both Mexico and Canada on February 1st: they were hastily rescinded when it was pointed out to him that the new policy pulled the rug from under the United States-Mexico-Canada Agreement (USMCA) tariff regime. The USMCA was his own brainchild from his first term when he unilaterally dissolved NAFTA, the North American Free Trade Agreement, the USMCA’s predecessor, in 2020; the origin of his frustration therefore was himself. Most recently in the tariffs arms race with China, his subsequent exemption of products such as mobile phones was another example of the penny dropping later than it should: ‘Mr President, did you really mean to more than double the US price of Uncle Sam’s own Apple iPhone simply because it’s manufactured in China? Everyone needing a new cell phone is going to switch to the Samsung Galaxy because South Korea only has a 10% tariff, the Korean Android does much the same job and it’ll be less than half the price. Is that really what you want? To undermine one of our country’s biggest and most successful companies?’ Some introspection is in order.

Trump’s tariffs are his chosen weapons with which to attempt to change bilateral trade flows in America’s favour. As the American/Chinese trade war stabilises at multiples rather than mere percentages of the ‘original’ tariff rate, Trump and General Secretary Xi increasingly find themselves impaled on their own petard of refusing publicly to back down. Neither can do so without losing face. What is easy to forget is that all the tariffs applied to China during Trump’s first term, and the reciprocal ones launched by Xi, are virtually intact. Certainly, President Biden was in no mood either to reduce or remove them. These new ones are tariffs on tariffs on tariffs on tariffs, so to speak. The world still turns, just in a different, more expensive and less efficient way than it might have done. Such is the perspective of the globalist.

Stand back and see the wood for the trees

And therein lies the root cause of today’s problem: the quid pro quo of globalism is the implicit loss of ‘sovereignty’ and national resilience when it comes to economic control. It was most in evidence in the Covid crisis of 2020 when near-global lockdowns simultaneously disrupted the demand-side of the economy and nearly paralysed the supply-side as supply chains disintegrated. By actively sub-contracting the parts of the economy they think are not worth the candle, or being forced to because their own national cost base is too uncompetitive, governments should not be surprised when over the long-term they find that the cumulative abrogation of responsibility has left their own economy either significantly out of balance, or weakened, or both.

However destructive the mechanism by which Trump is pursuing his MAGA ideology, it is because the West, including the US, has allowed and encouraged China to become not only the world’s dominant manufacturer but has facilitated it becoming a global superpower. China has its own view of world dominance in its sights. Many recognise the problem and the threat. Few know what to do about it. What makes Trump different from almost every other western leader is that he is not just willing to articulate the economic sovereignty and security issue but is determined to try and reverse it (while of course ensuring the US itself reinforces its Top Nation status: the “most dominant civilisation the world has ever seen”, as Trump declared his ambition in his recent address to Congress). Where Trump himself is blind or careless is that by simultaneously blitzing and alienating America’s allies as well as taking on its rivals, he allows China to present itself to them as entirely reasonable, much maligned, utterly misrepresented and a wholly trustworthy and willing partner with whom to do business. A couple of weeks ago the General Secretary was drawing Japan and South Korea into China’s gravitational pull in a proposed free-trade area; more recently it has been the EU with whom he has been having dialogue about frictionless trade. He wants relations with India to thaw. The tectonic plates are in motion however much Trump wants to secure terms with the same countries.

But “beware the Greeks, even when bearing gifts”. These governments should stop and ask themselves this: are they letting their indignation with Trump warp their judgement? China is marching along its declared path where Communism With Chinese Principles and its implied Sino Neo-Colonialism accelerate the explicit aim of its leadership of the New World Order to be achieved by 2049. That New World Order also includes breaking or at least eroding the hegemon of the US dollar as the world’s dominant and all-pervading reserve currency with its knock-on effects on the global financial system. Surely it is this titanic clash which Trump’s ideology has crystallised as the biggest geostrategic challenge of the modern era, one in which the rest of the world is potentially collateral damage as the trans-Pacific Colossi slug it out. Trump has destabilised global trade, albeit to what extent and to what end nobody is much the wiser. What is evident is that restoring the status quo ante is the least likely outcome.

Defence & Foreign Affairs: snakes & ladders

In the area of defence policy, from a US standpoint Trump has made considerable progress in a short time changing the ground rules in NATO to guarantee America’s continued commitment; that process still has a way to go forcing European members and Canada to think in terms of 5% of national GDP to be spent on defence, more than double the rate the current 2% bar is set at.

However, where Trump has so far failed is in his attempts to stop the war in Ukraine and to bring a conclusion to the conflict in Israel/Gaza. Of Ukraine, he said ‘I have the power to stop this war’; he does not. ‘I will bring an end to it in less than 24 hours’; he clearly has not. Outwitted by Putin, his has been an overinflated view of his own abilities as a deal maker and of America’s leverage over the Russians. Without US security guarantees, the Macron-Starmer ‘Coalition of the Willing’ initiative to ensure peace in Ukraine remains moonshine; with few willing and with little evidence of coalescence and with negligible political leverage, Europe has no independent means of ensuring post-conflict harmony between the two warring parties. Trump’s latest ruse to persuade Putin to accede to a ceasefire is his suggestion of an economic pact between the USA and Russia; as ever with Trump, the reductive starting point is what-is-in-it-for-us, even when the whole focus should be restoring the integrity of Ukraine’s sovereignty of which the US was one of the explicit guarantors; the subtext of Trump’s strategy is about US economic advantage and driving a wedge between Russia and China to weaken the foundations of China’s New World Order.

Elsewhere, the Houthis in the Red Sea and the Gulf, and Hamas in Gaza, have so far called Trump’s bluff to the threat to ‘rain hell’ on them. It remains to be seen if Trump’s negotiations with Iran about nuclear containment are any more successful than Biden’s which achieved nothing (the pretext of which was Trump’s withdrawal in his first term from the treaty negotiated by President Obama and the EU limiting Iran’s ability to enrich weapons grade uranium but which Israel was able to show Tehran had flouted).

Economics: enduringly but not endearingly familiar

While much is in flux, some preoccupations of investors are enduring. Government deficits and debt remain as stubborn and problematic as they have for at least half a generation. If anything, the situation is deteriorating rather than improving, Germany included where the debt brake law has been amended to allow an extra half-a-trillion euros of expenditure on defence and infrastructure (it is bizarre that having been resoundingly ejected from government in February and now accounting for only a third of the new Coalition seats, the centre-left Social Democrat Party has emerged not only as the CDU’s returning partner, but has been rewarded with almost half the cabinet positions including finance and defence; it is little surprise that Germans are increasingly disillusioned with domestic politics, turning to the parties on the hard right and left as alternatives; a post-election snap-shot poll shows the far-right AfD neck-and-neck with the new CDU Chancellor’s party).

With virtually all fiscal headroom bled from the system through a corrosive combination of high national tax burdens, high and rising borrowing costs and enduring deficits which keep an upward pressure on governments’ debt, the ability of many western administrations to weather economic shocks is significantly compromised. As a vivid illustration, the recent big spike in UK government borrowing costs driving the 30 year Gilt yield to its highest in nearly two decades because of the perceived threat to UK growth from Trump’s tariffs and the need to fund a higher level of defence, forced the Treasury to withdraw a planned auction of 30-Year bonds, replaced by lower-coupon 2-Year paper. In the US, the Federal Reserve and the White House are on a collision course over interest rates as the Fed hedges its bets over whether to keep interest rates high to counter the tariff-related inflation risk, or to reduce them to help maintain employment as the probability of recession increases.

Rather than confront the political challenges of fiscal prudence and good housekeeping with radical public sector reform, too many governments find it easier to rely on growth as their get-out-of-jail card to make their sums add up. It is a chimera. Governments do not control growth, as many including the UK are finding to their financial cost and their political discomfiture.

Three nuggets which sum up today

Finally, after peeling away the layers and wrapping up this brief state-of-the-onion (sic) analysis as we head towards the summer months, three metaphors which encapsulate the change, instability and frustrations evident in this new Trumpian era, still only three months old:

1. Bearing in mind the lack of anchor points in the new economic system, of the G7 nations (Canada, France, Germany, Italy, Japan, the UK and the US), only one, the Italian finance minister appointed in 2022, has been in office longer than Rachel Reeves of the UK (and she has only been in office since last July); excepting Italy, the average period in office of the other six key finance ministers in the western economic system is 4 months and three weeks.
2. The market capitalisation of Rheinmetall AG (€73.4bn, +140.7% year-to-date), Germany’s biggest defence contractor, has surpassed that of Mercedes-Benz Group AG (€54.6bn, -6.9% YTD) and Volkswagen AG (€51.5bn, -0.6% YTD).
3. The UK government, single-mindedly determined fully to decarbonise the electricity generating system by 2030, is forced to scour the globe to buy 100,000 tonnes of high grade coking coal to keep the financially unviable Scunthorpe steel blast furnaces open, when only a month ago the Department for Energy killed the last prospect of developing a new coking coal mine in Cumbria.

What comes around goes around. Wishing our readers a very happy Easter.

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