The contours of a new trade landscape

Near-term equity and currency moves represent a short-term shock to the markets as the investment community digests the tariff news and reassesses relative economic growth, earnings estimates, and access to markets. While the tariff overhang has not disappeared, we are now much closer to the beginning of the end. Total market uncertainty has now been replaced with at least some semblance of recognition of the parameters of a new global trading paradigm even if not everyone (or anyone) is completely happy with the outcome. While Trump’s transactional approach will mean that this overhang will continue for the foreseeable future as countries come to the bargaining table and negotiate with the US in the next few months, we are closer to getting back to an equilibrium, however different it will be from the prior period. Those countries that are seemingly first in line and willing to negotiate with the US are likely to secure better deals. 

In the short-term, Asia is likely to be hit harder, especially Korea, Taiwan, Japan, and some of the high-export-oriented parts of southeast Asia that have large trade surpluses with the US (such as Vietnam and Laos). It’s more of a mixed bag in Europe, and the Americas seem to be relatively better off, especially Brazil and Mexico. We are not expecting this overhang to dissipate right away, at least not until the tariffs are negotiated down, which may take some time. Tariffs as they currently exist will likely lead to near-term inflation and continued volatility in the stock markets. As always, however, the entrepreneurial spirit will prevail, and individual companies will find unique and innovative ways to manage this new environment. I only expect to see a one-time hit and some near-term inflationary pressures. 

The risk in all of this is further retaliation instead of negotiation, with a panic unwind selling of US (especially passive) assets and a further weakening of the dollar. A weaker dollar would complicate efforts to keep inflation in check making the US Fed’s job more difficult. China has announced retaliatory tariffs of 34% on US goods, to go into effect April 10. Still, our base case is that we are closer to a bottom and that the next few days and weeks will represent buying opportunities. We believe that the near to medium term will mean further upside particularly for European and Chinese markets where the policy and cyclical backdrop is supportive. If, as we expect, the global economy averts a recession, we may see one or two quarters of economic weakness followed by a continued upswing and likely US outperformance by next year. Monetary policy loosening would also come into view sooner and faster. The pain inflicted on the US economy via DOGE and tariffs will mean a meaningful recovery, especially as tax and regulatory burdens come down. Aside from human ingenuity finding ways to adapt, another silver lining might be that tariffs end up collectively coming down around the world in the end. Either way, the world will adjust. As it always does.