Liberation Day: Trump is acting like President Xi

The big irony of ‘Liberation Day’ is that Donald Trump is behaving like he is president of China – like the leader of a country unhindered by democracy and for whom periods of domestic turmoil pose little threat.

The degree of economic intervention he is proposing is akin to the sweeping steps we have seen from President Xi and the politburo in recent years. Cynics might argue that there was more thought behind Beijing’s autocratic campaigns to tackle property speculation and reshape the Chinese economy.

Markets no longer acting as guardrails

Even in the face of recent market volatility and an evaporation of the animal spirits that followed Trump’s election, there were a handful of assumptions that underpinned most of the analysis about the prospects for the US, the global economy and the markets.

Many saw Trump as transactional rather than strategic. That meant his tariff threats were melodramatic starting positions designed to bully concessions from trade partners and that his bark would be worse than his bite.

Beyond this, analysts agreed that, though he has control of Congress and the Senate and the Supreme Court, he is ultimately a businessman and market opinion would act as guardrails on policy.

Unless we see a sharp, near-term reversal of the Liberation Day tariffs, we will witness an extended period of economic and geopolitical friction.

Ignoring the economic lessons of history

Liberation Day has undermined all those assumptions. The scope and scale of tariffs suggest a genuine belief in their capacity to rebalance and revive US manufacturing. This despite the lessons of economic history; despite the market voting machine; and despite underlying economic data suggesting that real business and consumer confidence has plummeted over recent weeks.

It suggests that policy is being shaped by ideology more than economic logic. You only have to examine Brexit to see the consequences of ideological policymaking. If there are any benefits from that act of economic self-harm, then it has taken many years for them to be evidenced.

Perhaps the 10% tariff on the UK versus 20% for Europe is our reward at last? So how long before the US sees any payback? And what is the price in the meantime?

It has always been felt that Trump lives off approval ratings and popularity, but unless we see a sharp, near-term reversal of the Liberation Day tariffs, we will witness an extended period of economic and geopolitical friction that cannot be good for the global economy, the American economy or the US dollar. 

America’s trading partners will have to forge new relationships. It might even drive many of them closer to China.

Three tectonic plates are colliding at force here – American populism, the fragile economic cycle and geopolitics. It is a rare alignment and a worrying one. Unpicking or remaking of decades of globalisation is an extensive process.

China could benefit from tariffs

And this brings us to a second irony. One of the biggest initiatives of Xi’s rule has been the “belt and road” drive. At heart, this is a strategy for building beneficial trading relationships beyond the US with emerging and neighbouring economies.

If Trump is behaving like Xi, so must we – but in a “belt and road” sense. America’s trading partners will have to forge new relationships. It might even drive many of them closer to China.

The lack of serious thinking behind these tariffs is perhaps best seen in the example of Vietnam. The US went to war in Vietnam to limit China’s influence there. Vietnam has a small domestic economy, but in recent years it has become a big exporter to the US – not to “rape and pillage” the US economy but because, with bi-partisan approval, US manufacturers have been building their relationships there to divert their supply chains away from China.

Now that strategy looks to be torn to shreds. Vietnam will have to find a new home for its goods. Adidas and the rest will have to reconfigure their supply chains. And those Walmart-shopping Americans who voted for Trump will find their clothes costing a lot more.

Pressure on Trump to reverse tariffs

It is hard to imagine American consumers and corporates having the patience to wait for any positives from Liberation Day. Trump may be behaving like Xi, but the US is ultimately still a democracy – and the pressure for Trump to retreat from the rhetoric of the Rose Garden can surely only build from here.