News & Insight • Market Insights
08 May 2025 | Simon King
A View from The Bridge - Born in the USA
We thought long and hard before deciding to focus this piece on the tariff driven trade policy currently being implemented by the US government.
Normally we do not like to write investment articles on subjects that everybody else is talking about. We also try to avoid allowing our own individual political views to seep into general narrative. In this instance we believe that we have to bend our rules slightly. Both the short-term and long-term impact of the current changes mean it would be unreasonable for us not to share our thoughts with our client base. With the drivers of these policies being so obviously political and nationalistic it is simply impossible to discuss them without some measured view of their origins and goals. We have started this piece on at least ten different occasions only for it to be over-run by events. Each time we assume there will be a pause in events or some reversion to mean, but unfortunately this has proven not to be the case, so we have decided to plough on. Bruce Springsteen’s poignant 1984 anthem Born in the USA seems to capture the balance of American pride and economic challenges which appear to be the root of the current malaise.
Even with this as a starting point, it is impossible to try to analyse and explain the motivations and rationale behind current US trade policies, so we will not try to. We rarely point our clients away from Vermeer Partners for sources of information, but to best understand the very long-term root of the problems that Trump is currently wrestling with, we can do no better than Warren Buffett’s brilliant explanation at Warren Buffett: Here's How I Would Solve the Trade Problem | Fortune. It has already proven foolhardy to try to predict what will happen in the immediate future with policies literally changing on a daily basis. We will outline where we are currently, highlight our thoughts on how markets have reacted, explain some of the unintended consequences of tariffs so far and then give our thoughts on what the future may hold.
So where do we stand right now?
To remind readers Donald Trump enacted a considerable number of tariffs and other measures in his first term as President. These were mainly targeted at China but tended to be limited in scope and softened over time. Joe Biden chose not to reverse the vast majority of these measures and indeed strengthened many of those focused on China. Trump made it very clear in his election campaign that he intended to implement wide scale tariffs, predominantly as a means of restoring manufacturing jobs back to the US. On the whole markets chose to ignore these warnings believing that Trump either did not mean it, was pandering to the electorate or would be reined in by more conservative advisers in his inner circle once elected. Soon after his election it became clear that in his second term, he would surround himself with diehard supporters all pretty much cut from the same cloth, which limited the scope for moderation. Even when he started to outline his specific policies, markets assumed they were negotiating tactics and would be pulled at the last minute. They could not have been more wrong.
To be clear, we struggle to understand the rationale, logic and calculation behind the actual policies being adopted by the US. We have some sympathy for the idea this is simply a money raising exercise in an attempt to balance the government’s books. However, there appears to be a lack of understanding of tariffs in both theoretical and practical terms. There is a highly selective approach to what constitutes a trade balance and to which existing tariffs and trade barriers are included, and the actual calculations employed are deeply flawed. However, we see little point in debating this further because we are where we are. Broadly speaking the Trump administration has put a universal tariff of 10% on any goods imported into the US. In addition, he has put further tariffs on any country which exports more goods to the US than it imports from the US ie has a trade deficit, and which vary according to a formula which defies any commercial or economic logic. Then there are a series of sector specific levies designed to protect industries which Trump regards as crucial to his Make America Great Again (“MAGA”) vision. To further complicate matters, many of these changes have been delayed and deferred while, depending on who you listen to, Trump negotiates unilateral deals with all of the US’s trading partners or simply makes it up as he goes along.
It is impossible to calculate what the actual average is now or will be in the future, but the base tariff alone will increase it from its pre-Trump level of c. 3% to around 10% and up to 25% if all the proposed levies are left in place. What is clear is Trump has taken a sledgehammer to the rules based global trade system developed post-World War II, mainly by the US, and administered by the World Trade Organisation (“WTO”). What will replace it is not clear, but the US obviously believes it should dictate it. We have some sympathy with the claims that the WTO is not an efficient or effective organisation, but a US-led attempt to genuinely reform it would surely be more palatable than the maelstrom that has currently been created.
Diligent clients will have noticed that we have so far managed to avoid mentioning China in this discourse.
It deserves specific attention not only because it is the world’s largest trading economy and has also so far attracted mind boggling levels of tariffs, but also because it has become clear to us, that the real reason for this trade war is that Trump wants to isolate China economically in order to thwart both its economic and military progression. We will not comment on the merits or risks of this ambition but would argue that current policies are not a particular focused or targeted means of achieving it. China is a very different beast to the one that Trump faced in his first term. It is a decade further on in its long-term economic plan and in its ageing demographic profile, has suffered a property boom and collapse that have knocked its economy off-course and most importantly has learnt many lessons from the trade war Trump started last time. We have already seen that rather than adopt a “wait and see” strategy, like it did last time, China has and will react swiftly and robustly to specific trade, policy changes and will engage with other countries to mitigate their impact. It has lots to lose in short-term exports, but will be only partially impacted by reducing imports. It has a very stable government with a focus on the long-term and possesses a series of advantages, such as huge foreign currency reserves and control of vital raw materials and goods, which it could choose to utilise in a period of escalation, and could make life very uncomfortable for the US. We assume the US government is aware of this and will dial down both Chinese specific tariffs and restrictions, and political rhetoric, but so far the signs are, at best, mixed.
Shipping...
The one area the Trump administration has at least given some thought to, is how it may gain the advantage it desires in shipping. Trump has made it clear he regards both shipbuilding and the shipping of freight to be key areas the US has to develop in the coming years. Aside from all the general tariffs he has also put a docking charge on all Chinese owned or built vessels offloading goods in the US. For context this involves well over 50% of the global shipping fleet. The major problem with this policy, is that the US simply does not possess shipbuilding capacity of any meaningful size. To develop a viable ship building capability in the US will take decades and it is not clear what if any competitive advantage the US possesses in this area. It is a very good example of where the long-term aims of the current administration may be laudable and popular, but where the choice of short-term policies is deeply flawed. The general strategy appears to be to smash up and severely disrupt any market, sector or industry where the US is not world leading, and then let the corporate world rebuild them with the US at their centre. This may resound well in Trump’s core elector base but belies a naïve understanding of how multinational corporates and capital markets behave.
Uncertainty & Risk
The main issue that the current and developing trade war produces for investors is a vastly heightened level of uncertainty and therefore risk. If it is impossible for the chief executive of a major company to have any idea what their trading terms will be even in the next week never mind in the long-term, then it is impossible for them to make capital allocation decisions, decide on global manufacturing locations or decide how to price their products and services. As long-term fundamental investors we are having to reassess the whole modus operandi of all of our major investments. This is a difficult task at the best of times, and we are having to make these assessments using an unusually large number of potential scenarios. Franchises that have performed well for decades and appeared to be well set for the future are now having their whole business models questioned. We have said for some time that we did not expect the next decade to be anything like the previous decade in terms of economic performance and the correlation of major asset classes. We did not identify that a global trade war of a quantum not seen since the 1930s would be the catalyst for such a breakdown, but that is what has occurred. It is worth noting there are several times in US history where it has reverted to protectionist trade policies. None of these initiatives have succeeded: one created the Great Depression and another the worst period of sustained inflation ever witnessed.
The real impact of tariffs is yet to be felt but they will certainly result in lower levels of growth around the globe and increased rates of inflation, particularly in the US. The notion that tariffs will be borne and paid by non-US exporters and not by the US consumer is simply wrong in our view. The short-term impacts on markets have not really been what most commentators and participants would have expected. In times of stress the US dollar, which is regarded as a safe haven, is expected to strengthen. The opposite has occurred, with the dollar reducing in value against most major currencies. The currency markets are so large and liquid that it is very difficult to know what is driving them in the short-term, but there does appear to be a genuine concern as to whether the US dollar will be quite so dominant in the future. If trade wars continue, then trade flows and patterns will change and not include the US to the same extent, so demand for the dollar to facilitate international trade will reduce. In addition, the US runs high levels of both trade and current account deficits ie the government spends a lot more than it raises in taxes and the US imports a lot more goods than it exports. This has led to the US having a very high level of debt, a large part of which is owed to foreign countries and investors. If they decide the US is no longer a dependable partner and/or not an attractive country to lend money to, then the dollar will come under severe pressure.
Likewise, when equities are weak it is generally expected that bond prices will rise, again due to a flight to safety. This has not been the case with bond prices falling as both inflation and therefore interest rate expectations have risen ie markets now believe that both inflation and interest rates will be higher in both the short and long-term than was predicted prior to the onset of the current changes. This has been exacerbated by parts of the Trump administration suggesting particularly outlandish approaches to dealing with the pressures the US government faces in dealing with its fiscal challenges. Although these will probably never see the light of day, the fact that they are discussed publicly increases the nervousness of markets.
One question which investors are obviously asking is whether individual asset classes look particularly cheap at the present time. As we have said previously the increased level of risk and uncertainty currently prevailing means that asset prices generally are likely to remain subdued until more clarity is available. Looking at individual asset classes and starting with equities, then we would argue that they appear neither cheap nor expensive. The overall rating of global equities remains in the middle of its long-term average, but we would caution that earnings expectations are probably materially too high and that there will be a series of downgrades in the coming months. As such we would expect particularly US equities to rise back towards the top end of their valuation range.
Bond prices and particularly government bond prices are being driven by a number of unusual factors at present. It is a long time since there has been a genuine concern around the US government's ability and willingness to repay its debts and although we are nowhere near these concerns actually happening, there have been enough nervous moments and volatility in the past few weeks to mean they will have to be monitored and will negatively impact bond prices. As such, although the outlook for interest rates should be downward, the inflationary pressures created by the current tariff regime mean there is little downward pressure on US bond yields. We continue to believe that bonds will provide some protection in periods of acute stress, the outlook for absolute return remains somewhat muted.
Commodity prices have also been under some pressure due to the uncertain outlook for global economic growth and concern as to the extent they will become embroiled in the current tit for tat tariff exchanges. Regular readers of our investment pieces will be aware of our scepticism as to whether “Alternative” investments provide protection in times of stress or uncorrelated returns to the other main asset classes. Their performance in the current turmoil has been the usual random walk and it has done nothing to alleviate our concerns. The one notable exception, which we do invest in, is gold, which has performed admirably. As risk, volatility and uncertainty have increased, gold has continued to rise since it is the only genuine way to store value outside the mainstream system. We remain long-term sceptics of crypto currencies particularly as an alternative to gold, but have to recognise that Bitcoin in particular has held up very well in this period of turmoil and that certain parts of the investing community do regard it as an effective store of value.
One of our major challenges is trying to anticipate the unintended and unforeseen impacts and consequences of current policies. We have highlighted a number already and our list is by no means exhaustive but includes: the possibility of China withdrawing support for US bonds ie stopping buying new and even selling existing ones; China winding down its investment in US Private Equity which has been huge in the last decade; a general shift of capital flows away from the US as it is deemed unreliable (“Capital goes where it is welcome and stays where it well treated” – Walter Wriston); the flow of international students may change again away from an increasingly Conservative US and towards other countries including the UK; the era which has become known as “American exceptionalism” ie a period when the US has simply done better than everyone could be over, and will certainly be less pronounced. We believe US multinationals have benefitted hugely from globalisation, particularly in increasing their profitability. This trend has manifested itself in many ways but none as spectacular as the huge boost it has given to US equity markets, which have become a larger and larger part of indices. Again, we think it is unlikely this will continue. We have long argued that although there are numerous excellent quality US companies, there are many others in different parts of the world.
Turning to the future...
Short of suddenly locating a reliable crystal ball then all anyone can provide at present is a series of best guesses. We very much doubt we will be returning to the same position we were at pre-Trump, so it is a case of applying probabilities. High on our list would be that several new trading blocs will emerge that do not include the US. There will be the obvious ones of a China led Southeast Asia zone and less obvious ones which will include the likes of Australia, Brazil, India, Canada and the UK, which will have to be more geographically flexible. We see little that the US can do to stop this trend, and its scale will be the long-term measure of the damage the US is inflicting on itself. The dollar will remain as damaged goods for quite some time. We do not see it losing its overall pre-eminence, due mainly to any realistic alternative, but as fewer people want to hold dollars (“de-dollarisation”) then its value will remain at the lower levels producing short term inflation problems for the US and the possibility that US interest rates could remain higher than expected for some time to come. In the shorter-term we are concerned about the fact the US Federal Reserve is stuck between a rock and a hard place. Not only is it under an unprecedented level of criticism and attack by the Trump administration but it will soon have to decide which of its two mandates comes first: does it raise interest rates in order to combat tariff driven inflation, or does it cut them so as to minimise unemployment and the extent of a recession that many are now forecasting.
We hope our clients will appreciate us telling it how it is at the present time. We would be both foolhardy and arrogant to claim we know how this will all pan out. We believe the vast majority of our current holdings will continue to prosper in the future, but we are not complacent and are redoubling our efforts to fully understand what could happen to them in different scenarios. One thing that is certain is whatever happens there will be a great deal of change. As we have commented many times previously, change brings risk but also great opportunity, for countries to forge new trading relationships, for companies to adapt and find new streams of business but also for ourselves as investors in finding new homes for our clients’ investments. As always, we greatly appreciate any feedback from clients on any of the matters we have discussed.