Thanks to stockpiling, both markets and consumers have so far avoided the worst of Donald Trump’s trade wars. But signs of trouble are starting to appear.
Tariffs, tension and Trump’s unpredictability
Chaotic and unpredictable, Donald Trump’s trade policies, like much of his presidency, are hard to track.
Following his “Liberation Day” tariff announcement in April, there were fears that Trump might crash the global economy. But after Wall Street’s sharp reaction, the world discovered a new term: “Taco” – which stands for “Trump Always Chickens Out”. Despite this, tensions are rising again.
Trump’s decision to impose new tariffs on his trading partners, including Canada, Brazil, India and Taiwan. After his self-imposed 1 August deadline has reignited concerns over global economic instability. Many countries are still reeling, and the rising costs will likely hit US consumers.
Wall Street remains steady
However, many believe it could have been worse. Nowhere is this more evident than on Wall Street: despite the chaos of Trump’s trade war, the stock market remains near record highs.
Following the latest escalation on 1 August, and the release of worrying US jobs data. Share prices fell by approximately 1%. Still, the decline appears to be a setback rather than a broader downturn.
The president’s unpredictability could trigger a further downturn. Trump’s decision to dismiss the official in charge of labour market data, along with his attacks on the independence of the US Federal Reserve, is likely to make matters worse.
Yet, despite earlier warnings of severe economic fallout from the US tariff war. The American economy has shown unexpected resilience in recent months.
Last week, the president highlighted US growth figures, showing the economy had grown at an annualised rate of 3% in the second quarter, well above the 2.4% forecast by Wall Street. Does this mean the “fake news” media got it wrong? And are tariff wars really “good, and easy to win,” as Trump says?
Although inflation rose from 2.4% in May to 2.7% in June. It still remains well below the highs the world experienced after the pandemic and Russia’s invasion of Ukraine.
In April, a divided America saw Democrats predicting inflation would hit 7.9% within a year, while Republicans expected it to drop to 0.9%.
Why the economy hasn’t collapsed yet
There are clear reasons why the US economy hasn’t collapsed yet. For one, the unpredictable nature of Trump’s tariff war means investors expect last-minute deals will be done to avoid the worst-case scenarios. Additionally, the toughest tariffs announced on Friday, 1 August are only just beginning to take effect, so their full impact has yet to appear.
Most countries have refrained from retaliatory measures, which would have significantly worsened the situation by putting international trade into a deeper downturn.
Meanwhile, fully aware of the risks posed by an unpredictable president, businesses have been preparing for months to avoid the worst-case scenarios.
US companies hurried to build up stockpiles ahead of the trade war, helping to keep prices stable for now. According to analysts at Deutsche Bank, some firms have accepted lower profits, believing this is better than passing on higher costs to American consumers who are worn out by years of high inflation.
Multinational companies are spreading the impact of tariffs by raising prices across the markets where they operate. For example, Sony has increased the price of its PlayStation 5 by as much as 25% in markets like the UK, Europe, Australia and New Zealand.
Still, signs of trouble are emerging. Prices will likely rise gradually once US businesses run out of their pre-tariff stockpiles. At the same time, the uncertainty of an erratic president is taking a toll on both jobs and investment.
Last week’s US jobs report has renewed worries about the strength of the US economy. Tariffs are dampening business confidence and slowly making their way into consumer prices.
Slower growth and rising risks
Although a 3% GDP growth rate sounds strong, it was largely influenced by a 0.5% drop in output during the first quarter, when US companies rushed to beat Trump’s tariffs. The average growth for the first half of the year was 1.25%, significantly lower than the projected 2.8% for 2024.
Part of the reason Wall Street remains relatively stable is the continued belief that the situation could have been far worse. Investors continue to expect deals to be made, with the pause in tariffs for key US trade partners Mexico and China suggesting this most clearly.
The investor view is that, more than imposing tariffs, the president would prefer high-profile moments before the TV cameras, preferably with trade partners paying tribute to the court of Trump.
However, it would be a mistake to underestimate the self-described “tariff man’s” enthusiasm for border taxes. Even if his most extreme threats are eventually negotiated, the end result is still likely to be worse than before. An economic hurricane might be avoided but even a storm is the last thing businesses and consumers need right now.
The true cost of Britain’s US trade deal
Britain’s US trade deal offers a clear example. While the 10% US tariff on British goods has been seen as a big win for Keir Starmer, especially when compared to the alternatives, it is still far worse than before.
British cars will face a tariff rate four times higher than before, putting UK jobs and growth at risk while increasing costs for American consumers.
For the US consumer, the average tariff stood close to 2% before Trump’s return to the White House. Following his 1 August escalation, that figure has jumped to around 15%, the highest level seen since the 1930s.
Nearly a century ago, a similar wrong-headed protectionist approach in Washington worsened the Great Depression: the Smoot-Hawley tariffs not only harmed the US economy but also triggered a wave effect among main industrialised nations, ultimately leading to the second world war.
Conclusion
There is still hope that history won’t repeat itself despite the uncertainty of Trump’s trade war. But the damage is real and growing. Rising tariffs, weakened global confidence, and Trump’s unpredictable leadership are adding to the risk. While a major crisis may still be avoided, economic difficulties are clearly on the way.
Disclaimer: This material is for general informational and educational purposes only and should not be considered investment advice or an investment recommendation. T4Trade is not responsible for any data provided by third parties referenced or hyperlinked in this communication.
