The honeymoon period is coming to an end for Donald Trump. Up to now he has had the wind in his sails, grabbing all the attention and signing off a blitz of executive orders. Big business has fallen in behind him. World leaders have queued up to seek favour.
But his presidency now enters a crucial six weeks. The US president has said that next week he will move ahead with tariffs on Mexico and Canada and impose an additional 10 per cent charge on China. The crunch is coming in negotiations on the next US budget, where proposed spending cuts will make what Elon Musk has been up to look like a gentle warm up. Early next month, Trump will receive a report from officials on the trading practices of other countries with the US, and more tariffs are promised.
In advance of this, Trump has said that big tariffs are coming on imports from the EU. “It’ll be 25 per cent generally speaking and that will be on cars and all other things,” he said after his first cabinet meeting this week. So-called reciprocal tariffs are also planned on all trading partners. Special tariffs are promised on key items such as pharma and semiconductors. No one has the slightest idea how all these plans fit together and the communication of them indicates either confusion or disagreement among Trump’s competing group of officials and ministers. Or quite possibly both.
Financial markets have – up to the last few days – taken a remarkably relaxed view of all this. And other international leaders have been trying to get on “the right side” of a capricious US president. Keir Starmer was no doubt happy to be greeted in the White House amid talk of a new US/UK trade deal.
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Investors have been acting on the basis that this is all part of a strategy to dominate the news agenda and unsettle opponents – and that huge upheaval and trade conflict can somehow be avoided. In other words, that when Trump says he will impose 25 per cent tariffs on EU goods, he does not actually mean it, because were such tariffs to be in place for any length of time then they would start a trade war with Europe. The Centre for European Reform, a London think tank, estimates huge economic costs for both sides. EU exports to the US could fall by one third.
But what if Trump is not bluffing? This is the fear that has started to circulate in the markets late this week. First the crypto market took a hit. Then shares started to fall on both sides of the Atlantic – particularly risky tech stocks – and the cost of borrowing for the US government edged higher. Having looked only for reasons to buy since Trump took office, investors are now looking for reasons to sell. The psychology has changed.
The next few weeks will tell a lot. Will Mexico and Canada manage to hold off tariffs? How will China respond to Trump’s latest move?
And what happens early next month with the promised reciprocal tariffs and charges on the EU? The key question is whether Trump really wants to remake world trade and upend the way the US public finances work and will accept significant chaos in doing so.
Some seasoned observers still see it as part of a transactional strategy in which Trump makes threats, seeking something else in return
Remember that a wing of the US administration sees tariffs as a long-term strategy to raise cash for the US and help pay for tax cuts elsewhere. And the US budget will be a key focus in the coming weeks as Trump and the US Congress try to hammer out a deal for 2025/26 and a shorter-term agreement to avoid a government shutdown on March 14th. Failure here could also hit the stock market, including the bond markets where investors lend to the US.
The alternative theory is the tariff threats are part of a wider game. Some seasoned observers still see it as part of a transactional strategy in which Trump makes threats, seeking something else in return. One target is other countries – let’s see what Trump tries to squeeze out of the UK to avoid tariffs or out of Europe on defence spending. And from the EU. Here Trump has said that he wants to see changes not only in tariffs – which are limited anyway – but on VAT and regulations including controls on food imports and the oversight of the big tech companies, areas where the EU simply cannot deliver much. If access to the US market is to be predicated on changes here, trouble really does lie ahead. Trump is asking for things which the EU simply cannot deliver. And with relations with Europe now in trouble following the fall-out between the US and Ukrainian presidents in the White House on Friday evening, there is now a toxic political backdrop to any attempt to do a deal to stop tariffs being imposed on the EU.
Another target for Trump’s threats looks to be US multinationals, whose supply chains would be hard hit if tariffs did go ahead. Trump will press them to pay more tax in the US and to invest more there. In the last week Apple has promised to spend $500 billion in the US (though much of this seems to be business as usual) and – perhaps more significantly for Ireland – pharma company Eli Lilly committed to invest $27 billion in four new US manufacturing sites, saying it was “investing in America and its workforce”. The company employs 3,500 here – and sales back to the US of its weight-loss drugs have boosted Irish pharma exports.
But even in this transactional theory of Maganomics, bluffs on tariffs can only take Trump so far. At some stage, to be credible, he has to press the button – and this has to go beyond China where trade conflict always looked likely.
For Ireland, the uncertainties in our major trading and investment partner are a fundamental concern. It is just impossible to calibrate the extent to which Ireland would be hit. If pharmaceuticals were tariffed, or big digital services firms got caught up in the battle between the two sides, it would be significant and worrying. More investment staying in the US raises questions about our economic model in the longer term.
Perhaps Trump won’t go ahead full-bore with his tariff plan. But either way, chaos is coming. The only question is what shape it takes.
