Under The Influence of Policy Punch
It is becoming increasingly difficult to follow the US’s trade war with the rest of the world amid all the percentages, caveats, letters, delays, ally-alienation, negotiations and threats. The market turbulence since Trump's election last year is therefore hardly surprising. This ongoing uncertainty is now compounded by the administration's recently enacted "Big, Beautiful Bill," creating a complex and sometimes contradictory economic landscape for the US.
One thing that is certain is that US tariffs will remain elevated compared to pre-Trump levels. In fact, the average effective US tariff rate is currently the highest it has been since 1934, acting as a persistent drag on the US dollar. These tariffs cast a long shadow, dampening both global and domestic economic growth. The levies translate directly into higher costs for US businesses, especially those relying on imported materials. These increased costs are often passed on to consumers, eroding purchasing power and fuelling inflationary pressures. Moreover, unpredictable trade policies disrupt established global supply chains, pushing companies to consider costly onshoring initiatives and fostering widespread market volatility that stifles investment. As OECD Secretary-General Mathias Cormann has explicitly warned, continued trade barriers would further depress growth prospects and push inflation even higher.
Concurrently, the "Big, Beautiful Bill" introduces a substantial fiscal intervention. While its proponents argue that the embedded tax cuts will spur economic growth and offer relief to families, critics point to the implications for a substantial increase in national debt, potentially adding trillions over the next decade. This could lead to higher interest rates and reduce the government's fiscal flexibility for future needs. To offset some of these tax cuts, the bill also includes significant reductions in social safety net programmes and green energy initiatives, redirecting funds towards areas like border security and military spending. This dual impact, potential economic stimulus from tax cuts alongside the drag of rising debt and cuts to other programmes, creates an uneven economic effect.
Considering this volatile mix, the US economy faces a period of continued uncertainty. The combination of tariffs, which increase costs and curb demand, and the fiscal policy shifts, with their trade-offs between growth incentives and debt accumulation, results in a more subdued growth outlook than previously anticipated.
Meanwhile, low-tariff nations gain a significant competitive advantage due to reduced costs for businesses. This allows them to produce more affordable goods for consumers and boosts their export competitiveness by providing unhindered access to global markets. This approach fosters economic efficiency, attracts foreign investment, and drives innovation. The stability offered by low-tariff environments is particularly appealing to investors. For example, countries like the UAE, Saudi Arabia, and Chile currently face the general 10% US import duty. To caveat: some emerging market economies could potentially face higher tariffs in the near future, depending on US-trade developments related to BRICS.
For investors navigating this complex global environment, a prudent strategy involves seeking stability and predictable returns. Therefore, we believe investing in high-grade, wealthy nations with low tariff rates presents a compelling proposition.
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