It’s been hard to keep up this week. And even more difficult to put what is happening in some kind of context. The “tl/dr” (too long, don’t read) version is that Trump was forced into a stunning retreat, which has left a possible pathway to avoiding a full-scale global trade war, but big risks and uncertainties remain. Markets are on a rollercoaster, driven by the latest pronouncements from Washington. Behind it all lies a creeping realisation that the world is changing shape and no one is quite sure where it will settle.
This is about a lot more than tariffs, of course, with Trump moving to remake American society and undermine its democracy. All this has a link to the economic story – investments in a country are based on confidence in its institutions and legal processes. A telling part of what is happening is the sales of US government bonds, or treasuries as they are known, which are effectively a way for investors to lend to the US government. And also the decline of the US dollar.
This sale of all things American is investors voting with their wallets. And as the US president faces a big budget deficit, this is a problem for him – he needs the money. In this context, picking on China, one of the biggest lenders to the US, does not look very smart.
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Some people are still seeing a cunning master plan in the background, such as a drive to lower the value of the US dollar and boost exports. But this week has made one thing very clear – you can look in vain for some clever strategy behind all this but there simply isn’t one, bar the ongoing reality show episodes it provides. It is a mess and – unless Trump can plot a retreat – will end up in ongoing, rolling chaos. And if something breaks in the plumbing of the bond market, there really will be trouble. (Think Liz Truss squared).
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So, where are we now? Global 10 per cent tariffs remain, as well as higher changes on steel, aluminium and cars. Tariffs in place between the US and China will stop pretty much all trade between the two – anything further here from either side will be purely performative. This trade war, if it goes on, will also have a wider impact on the world and Irish economies. Pharma tariffs are still threatened. This is all bad enough – and it is a signal of where we are that the markets soared in the middle of the week purely on the basis that things were not going to get any worse.
But they have got edgy again because massive uncertainties remain. They are still, to use Trump’s golfing analogy to describe a golfer who is too edgy to putt, “yippy”. The cost of the China row ramps up. And while Trump is weakened now in negotiations, it is still unclear whether we might, like a sequel to a poor horror movie, be back in the Rose Garden for Liberation Day Part 2 in three months. Trump has only suspended the additional tariffs put on many countries, including the 20 per cent on the EU, for 90 days.
In the meantime, the impact of this economic uncertainty will be significant. “Manufacturing investment globally is in a deep freeze for 90 days,” as one source put it. And it could go on much longer. Senior financial sources confirm that merger and acquisition activity has pretty much stopped. Many businesses are putting big decisions on hold – and this will cascade through the economy. Consumers are also likely to become nervy, particularly those in the sectors which may be in the direct firing line. And this includes many higher-paid employees in sectors like pharma and – in terms of potential EU retaliation – big tech. While bank lending and housing market activity remain solid, any hit to higher paid jobs, or to pay and share options, will quickly feed through here, too. People buying houses, after all, are driven not only by what they can afford but also by sentiment.
The Central Bank of Ireland has estimated that the impact of uncertainty could knock up to 1.7 per cent off demand in the domestic economy over a year, due mainly to a hit to investment and consumer spending. This means that the economy would not grow as fast as previously expected.
Nor will 90 days mark the end of this. Unless Trump settles for a few baubles, any meaningful trade deals will take longer. He may lose patience and start hiking tariffs again and other countries could respond. In its calm way, the European Union is working out the responses it can make – these will not be easily agreed. There are dangers here for Ireland in the Commission’s wish to target digital tech. But sitting and watching as Trump’s strategy implodes is not a bad policy for now. The exercise of power in international economics is a brutal process – and the EU and others will now sniff blood after Trump badly overplayed his hand and was forced to retreat. But – based on what he has said so far – an agreement between the EU and the US will still not be easy to find.
And it will take some years for the really big questions to be answered. Trump is trying to upend US democracy and remake its society – as well as reshape the world economic order. All this will seriously damage the leadership position of the US in global economics and finance – at an enormous cost to its economy. And it may well drive away investment and expertise. Big business wants policy predictability. Employees who have the choice want to work somewhere where they don’t have to worry that the government might be upset about what they say.
Ireland’s – and the EU’s – opportunity is to be the anti-Trump, a bastion of stability, democracy and predictable government. As the Taoiseach said this week, big investors crave stability. But on its own it is not enough. The EU also needs to take a serious look at its competitiveness – and the key issues for Ireland here of housing, water and energy have been well discussed, though a way forward remains unclear. The uncertainty is going to last longer, but this State has to mind its own house.
