Trump Blinks, Markets Begin to Stabilise

Given the incredibly fast pace of change we are witnessing in the whole tariff saga, I thought it would be helpful to give a regular update that attempts to quantify or at least shed some light on the latest developments.

Regular readers will know I have consistently maintained that the originally proposed tariffs presented a worst-case scenario. Not only would they be ameliorated through engagement and the application of rational analysis, but in their original form, they were nowhere near as economically damaging as a rather hysterical consensus has claimed over the last two weeks.

In recent days, we have seen more tariff-related announcements from President Trump. On the one hand, he has announced an investigation into the imports of pharmaceuticals and semiconductors with a view to imposing tariffs on the grounds that the US’s extensive reliance on foreign production of pharma ingredients, finished drugs and semiconductors poses a national security threat. On the other hand, he has, for the time being at least, exempted smartphones, computers, and some other electronic devices from his “reciprocal” tariffs, including the 125% levy imposed on imports from China. Apparently, the US Customs and Border Patrol has already said in a notice that these goods would be exempt from Trump’s 10% global tariff and the much larger Chinese tariff.

In addition, in what is clearly another climb down from the previously stated position that predated Liberation Day, Trump has also said that he is looking “at something to help some of the car companies” with the 25% tariffs he imposed on cars back in March and on auto parts which are due to come into force no later than May 3rd.

Both of these two significant backward steps by Trump seem to have been prompted by a dose of economic reality dawning on the US administration. For example, in the wake of his initial Liberation Day announcement, presumably after some intense lobbying by Apple in particular, it became clear that the price of some electronic devices would have increased significantly if the initial proposal had been implemented. (Some have suggested that the price of an iPhone might have tripled in the US)

It would appear that the same kind of wake-up call also got through on the automotive tariff proposals. Ultimately, the administration seems to have accepted the seemingly obvious point that it takes time to shift component sourcing geographically and probably even longer to move final assembly lines in the automotive industry.

Some might argue that this was always part of the original Trump plan and that what we now see in the form of positive action to relocate manufacturing to the US in the consumer electronics and automotive industries is exactly what the administration wanted. Whether it was or wasn’t, these latest developments are proof positive that the initial proposals were clearly a worst-case scenario and that what will eventually transpire will be significantly less damaging than financial markets were discounting a few days ago.

In other news, it seems that policymakers around the globe are beginning to react to the Trump tariff shock by doing precisely what I thought they would, which is to begin the process of relaxing monetary policy. (Central Bank policy guidance) There is already evidence of this in Europe, China, Australia, New Zealand, Taiwan and Canada, and I would expect to see more of the same in other leading developed economies in the weeks ahead and particularly here in the UK, both in the form of guidance and rate cuts. In keeping with this, bond markets are beginning to settle down after a brief period of extreme volatility and yields, especially at ten-year maturities, are falling again.

Energy prices have also weakened, as has the US dollar, both of which will have an important impact on global inflation that I believe will significantly outweigh the one-off inflationary implications of the Trump tariffs. (Wherever they end up)

Elsewhere, in a lengthy white paper, China’s policymakers have again outlined the economy’s resilience in the face of the Trump tariffs and have highlighted their willingness to engage in “dialogue and consultation” as a way to resolve the dispute with the US. As if to underline this point, one of the companies many observers might have argued would be most exposed to the potential harm of US tariffs on China, CATL, which is the world’s largest manufacturer of EV batteries with a 38% global market share, today said that it sees little impact from US tariffs and is confident on the outlook for 2025. In its first quarter results, it reported a 33% jump in earnings and higher margins. But possibly the biggest surprise was what the business said about its total battery shipments to the US, including direct and indirect sales, which amounted to only 2-3% of total sales in Q12025, compared with analyst estimates as high as 12%. Clearly, this is only one, albeit important, business, but this illustrates the resilience of many of China’s most successful scaled manufacturing companies in the face of Trump’s tariff threat.

And finally, in news that I think backs up my view on what’s going on in the UK economy, and hot on the heels of last week’s much better-than-expected February GDP data, the ONS published data on the labour market yesterday, which shows more people in work, enjoying slightly slower, but still good real growth in wages, and encouragingly, from the BRC, retail sales data that was quite a bit better than expected too.

Summary

Having presented a non-consensual, more upbeat interpretation of the Trump tariffs, I suspect that some readers may be questioning my sanity or at least wondering if I have fully understood the gravity of the trade measures his administration has come up with. I can completely understand this perspective, not least because the overwhelming consensual view is that the Trump tariffs are extremely economically damaging and will, at the very least, pitch the US economy into some kind of stagflationary environment and the broader world economy into a much lower growth, troubled future.

To add to the gloom, in seeking to secure scapegoats for a worse-than-expected future economic outcome, policymakers everywhere, especially in the UK, are eagerly jumping on this bandwagon, suggesting that the future is getting more troubled by the day.

Having spent a lot of time thinking about this, I am still convinced that the consensus is, once again, simply wrong on this. So far, I have been broadly right in thinking that the original Liberation Day announcements, which so spooked financial markets, were a worst-case scenario. Trump is clearly blinking and stepping back from his original proposals almost by the day, and I suspect that negotiations with China will start soon despite the sabre rattling.

Having said this, I do not underestimate the challenges individual exporting businesses are confronting right now, not least because of the impossibility of planning anything while policy changes daily. But I do expect more clarity to emerge in the weeks ahead, and albeit some damage is being done to the economic prospects of these exporting businesses, the important offsets (lower energy prices and lower interest rates) affecting the vast majority of businesses in most economies that have absolutely nothing to do with exports to the US, will more than compensate for these challenges.

Clearly, this minority view is beginning to gain some traction in financial markets now, despite the chorus of gloom. Going forward, I expect equity and bond markets to remain febrile, but as I said last week, markets had overreacted, especially outside the US, and by implication, would recover as they are now doing.

I would be surprised if this rally takes equity markets back to where they were prior to Liberation Day in the very short term, but having said that, I believe those that were undervalued before this wobble should regain those higher levels relatively quickly and certainly before the end of the year.