[SINGAPORE] As US Treasury bond yields surged last week, forcing US President Donald Trump to pause the crippling “reciprocal” tariffs that had just come into effect, I wondered why on earth he was trying to reset US trade policy in such a callous and destructive manner.
It occurred to me that his goal might not just be to address the country’s persistent trade deficits, but also to elicit a sense of dismay and shock among its trading partners in order to be able to claim he has struck a blow for ordinary Americans.
President Trump’s politics is about casting America as a victim and himself as its fearless saviour, prepared to take action nobody else will in order to defeat its “enemies”.
Among other things, he has put a stop to diversity, equity and inclusion policies across the US federal government, military and private sector; declared that there are only two genders, male and female; and changed the name of the Alaskan mountain Denali back to Mount McKinley.
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As for trade, he has long grumbled that America’s persistent trade deficit and loss of manufacturing jobs were the result of the rest of the world ripping it off. However, attempting to solve this problem by attacking perceived enemies with big import tariffs has serious economic and geopolitical consequences.
This past week, the Trump administration may have learned that taking on the US courts and coastal elites is nothing compared to incurring the wrath of global investors.
Bond market revolt
While Trump was widely expected to unveil trade tariffs on some of America’s most significant trading partners as soon as he took office, there did not appear to be much nervousness in the market initially.
In fact, the S&P 500 began declining only in mid-February, shortly after President Trump announced tariffs on Canada, Mexico and China. Even then, there was doubt that those tariffs would actually be implemented, and it took time for reality to set in.
Market sentiment really soured after he announced on Apr 2 that hefty individualised reciprocal tariffs would be imposed on countries running trade deficits with the US, and that all other countries would be hit with a baseline rate of 10 per cent.
The reaction in the US Treasury bond market was particularly unnerving. While the 10-year yield initially tumbled after the Apr 2 announcement, it began rising shortly after – indicating that US Treasury bonds might be losing their traditional safe-haven status.
Worse, the greenback began weakening against other major currencies.
On Apr 9, President Trump backed down and announced a 90-day pause on the individualised reciprocal tariffs for all countries except China, which was hit with a tariff hike instead.
While Trump administration officials said the move was all part of his negotiating strategy, the president himself later admitted he acted because investors were getting queasy.
Whatever the case, it does not appear that he has done enough to calm the market. Last week, the S&P 500 rose 5.7 per cent, but the 10-year Treasury bond yield ended the week about 50 basis points higher. The US dollar index was 2.8 per cent lower.
Why were some investors still queasy? Even with the 90-day pause on the country-specific reciprocal tariffs, the US will still have a baseline tariff of 10 per cent on imports from most countries. Moreover, its tariffs on China have risen to 145 per cent.
By some estimates, US consumers now face an overall average effective tariff rate of 27 per cent – the highest since 1903. This could weigh on economic growth over the medium term.
So, what does all this mean for Singapore and other trade-dependent economies in this region? What should investors do?
Continued market pressure
The way I see it, President Trump has tipped his hand.
While he had previously acknowledged tariffs would bring some economic pain, he evidently underestimated their potential impact. When faced with clear market signals of what lay ahead, he simply did not have the stomach for it.
In my view, continued market pressure may prompt him to back away from the tariffs he has announced. In fact, he has already floated the possibility of granting exceptions to the 10 per cent baseline tariff.
In another interesting development, the US authorities clarified late last week that several products – including smartphones, laptops, hard drives, computer processors and memory chips – are exempted from the reciprocal tariffs. However, these products could eventually be subject to other duties.
This possibly shifting stance by President Trump could put trade-dependent economies in Asia in a better position to cut deals for themselves during the 90-day pause.
Canada and the European Union, which had both earlier announced retaliatory moves against the US, have also welcomed the 90-day pause and said that they will negotiate.
The big question is what will it take to de-escalate tension between the US and China, and for the two countries to hammer out a sensible deal.
Last week, China said it would put tariffs of 125 per cent on goods from the US, and ignore any further levies by the Trump administration. Chinese President Xi Jinping is due to visit Vietnam, Malaysia and Cambodia this week.
Creating new opportunities
This column said last week that investors should not be in a hurry to take advantage of the recent market sell-off, as the turmoil triggered by President Trump’s tariffs could take several months to run its course.
Yet, if he continues to water down the tariffs he has announced, market sentiment may well improve in the weeks ahead.
It is still probably a good idea to be cautious, though. In the first place, the turmoil and uncertainty caused by the tariffs might have already disrupted economic growth and corporate earnings prospects for this year.
Moreover, Trump’s obsession with America’s persistent trade deficits might not wane. This could make many investors wary of countries that are too export-dependent, and companies that are overly reliant on cross-border supply chains.
Over the longer term, however, the evolving relationship between the US and its key trading partners may create a host of new opportunities for countries around the world to restructure their economies and engage investors differently.
As China gradually decouples from the US, it may continue to draw investors by flexing the progress its companies are making in new fields such as artificial intelligence, and by highlighting its efforts to adopt a more shareholder-focused approach to corporate governance.
The markets in Asean, meanwhile, may gain new relevance after more than two decades in China’s shadow. The key for companies in this region could be to demonstrate that they have a strong competitive advantage in their chosen field that goes beyond low costs.
This will take time, of course. Luckily, valuations in this region are still relatively low.
