So, in another wild turn of events, Donald Trump announced Wednesday afternoon that he was postponing reciprocal tariffs for 90 days for everyone except China.
This led markets into a frenzy, with the US Nasdaq 100 ending the day 12% higher, the. Biggest daily rise since 2001. European and Asian markets followed, with risk sentiment improving across the board. However, it is best not to assume that the only way is up from here, and sentiment has already started to unwind on Thursday morning.
Given the current environment, the outlook could change dramatically by this evening, or we may witness the 90-day truce play out as expected. The situation remains fluid, and this unpredictability is contributing to heightened market volatility, making it a challenging time for investors to navigate.
In an effort to minimize speculation about the immediate future, let’s assume that the 90-day truce becomes the norm. In this scenario, if the US proceeds with imposing 10% tariffs on all nations except China, how might this reshape the global trade landscape?
The Global Trade Impact:
Firstly, it’s important to note that Trump has consistently pressured other nations to take sides in his confrontations with China. This move could compel other countries to either impose their own tariffs on China or face retaliatory actions from the US. Those nations that do not align with US tariff policy may be seen as favoring China, potentially damaging diplomatic relations. As a result, the US-China trade war could escalate beyond just these two nations, with broader consequences for global trade. We could see the emergence of two major trade blocs, further complicating the global trading system.
Secondly, if China is subject to high tariffs from the US while other countries benefit from freer trade, Beijing may seek to deepen its economic ties with non-US partners, particularly within the BRICS alliance. This shift could lead to new trade routes and more complex international supply chains. Companies might begin rerouting Chinese goods, relabelling them, or re-exporting them through third countries to avoid the US tariffs. While this might help avoid the direct tariff impact, it could introduce additional layers to the supply chain, ultimately increasing product costs and reducing efficiency.
Potential Consequences for Global Growth:
While the initial market reaction was positive, reflecting a sense of relief that the worst-case scenario—reciprocal tariffs for all—was avoided, the longer-term outlook for global growth remains uncertain. A protracted trade war between the US and China could continue to dampen global economic activity. Although certain countries might experience a boost by taking over China’s role as key exporters to the US, Trump’s autarkic approach to trade is likely to limit such opportunities.
There is also a real possibility that this is just another episode in Trump’s playbook of using market sentiment to influence negotiations. It’s entirely feasible that in a few days or weeks, the situation could take another dramatic turn, in which case, this analysis will be pointless.
By Daniela Sabin Hathorn, senior market analyst at Capital.com
