Has Trump “liberated” China and Europe?
Among the group of countries hit by new trade tariffs from the US, China has suffered most with the imposition of tariffs of 145% since 10 April – practically a blockade. However, since Trump’s inauguration on 20 January, Chinese equities have been among the best performers: the MSCI China (in dollars) was up 16% as at 8 May, whereas US equities had lost 5% over the same period.
This apparent inconsistency also applies to other countries. The MSCI Europe (also in dollars) has risen by 13% over the same period, although Europe is a massive exporter of manufactured goods to the US and subject to a 10% tariff since 9 April.
So, are these punitive measures on exporting countries proving beneficial for them? There are a number of reasons that help explain this surprising phenomenon.
Firstly, the economic reaction of the targeted regions. In China and Europe alike, the US offensive has unleashed – at least indirectly – reaction in the form of support measures. Of course, the backgrounds are different. China has been mired in a real estate and consumption crisis for several years and had started to introduce stimulus measures several quarters ago. These have been stepped up, and financial conditions eased another notch. On 8 May, Beijing thus again lowered its key rates and the reserve requirement ratio for banks. Europe, on the other hand, was not undergoing any exceptional fiscal measures. However, it swiftly adopted a new doctrine on public debt, which is now encouraged, providing it helps to strengthen military capabilities. Even if this new approach can be justified on geostrategic grounds, it is hard to ignore the particular relevance of this fiscal stimulus, which will be very useful in offsetting the expected slowdown in exports. Germany, which intends to liberate itself from what had, up until now, been an inalienable dogma on a strict limit for public indebtedness, represents the best example of such a reaction. As for the European Central Bank, underlining the increasing downside risk for growth and thus probably for inflation in the medium term, leaves greater leeway for a more accommodative policy, mirroring China’s stance.
The second reason lies in the relative mistrust of US assets. This situation, brought about by the White House’s apparently chaotic trade policy and evident tensions between the government and the US Federal Reserve (Fed), augurs renewed instability.
The flourishing health of markets outside the US may also be explained by differences in monetary policies. The Fed may struggle to lower interest rates in the short term if import tariffs result in a rise in inflation. “Liberation Day”, far from freeing the US economy from its own limitations, has – after a fashion – tied the hands of the Fed.
Lastly, from a geopolitical perspective, the bravado of China, which has not shied away from responding to the tariffs offensive, signals its liberation from its posture as a country whose trade is dominated by US demand. The attitude of China gives no hint that they will be the first to blink when faced with costs of the trade war. A symbolic line has been crossed. This phenomenon is, of course, less evident for Europe, which has nonetheless dared to threaten Washington with reprisals on trade. This situation would have been unthinkable before Donald Trump’s second mandate.
The world outside the US therefore has President Trump to thank for forcing them to loosen the heavy yoke of US demand, and stock markets are celebrating this.