Wall Street’s Trump trade has turned sour. Ahead of November’s election a near-consensus developed amongst financial analysts that a second Trump administration would be excellent news for US stock markets and push the dollar higher. Investors positioned their portfolios accordingly. But since the inauguration in January, US stocks have tanked and the dollar has headed south against most major currencies. Many US economic indicators have started flashing red. The immediate economic outlook has worsened, but more significantly there are signs that the very shape of the global economy could be shifting.
The logic behind the Trump trade was always questionable. Fundamentally it was a bet that Donald Trump would follow through on his campaign pledges that markets respond positively to, such as large cuts in corporation tax and a sweeping programme of deregulation, coupled with a belief that the pledges markets respond poorly to – such as tariffs – were mostly bluster. In fairness to analysts, this is not a bad description of how the first Trump term played out. Then the White House talked a good game on tariffs, but its actual policies were always more restrained. Outside of China, it engaged more in trade skirmishes than trade wars. And crucially for investors, the first term version of President Trump seemed to care about the stock market. The level of the S&P 500 acted as a check on his baser instincts with sharp falls causing him to pull back.
This time things have been different. In just eight weeks in office the new administration has twice increased tariffs by 10 per cent on China, whacked 25 per cent tariff on imports from Canada and Mexico (from which some sectors and goods have now been given temporary exemptions) and placed a 25 per cent import surcharge on steel and aluminium. In addition, Trump has threatened taxes on imports as diverse as lumber, agricultural goods, copper, pharmaceuticals, cars and computer chips and said he’d implement tariffs in response to UK and EU taxes on US tech firms. In early April he will introduce a package of so-called reciprocal tariffs. While the exact details remain unclear the administration has spoken of matching tariffs charged by all US trading partners across all goods and, in a starkly new move, treating value-added taxes as a form of non-tariff barrier to be met by US import charges. This would mean that the UK’s VAT rate of 20 per cent of most goods would be treated as a tariff and as such, the UK goods entering the US would be charged an additional 20 per cent import tax as a result. This would be a major escalation, the equivalent of taking the trade war nuclear. But the policies implemented so far are already monumental. The 20 per cent tariff implemented on China is close to twice as high as any steps taken between 2017 and 2021.
What has rattled the US economy is not just the tariffs themselves but the process of their implementation. The first Trump term was, to say the least, often chaotic. The pattern of Trump posting something unexpected on social media, followed by a furious market reaction and then the administration walking back whatever was first proposed a few hours later is eerily familiar to anyone who followed the last Trump White House. This time, however, things have been worse.
Take the Canadian tariffs as an example. On 20 January, hours after his inauguration, Trump said he would impose a 25 per cent tariff on Canada (and Mexico) by the beginning of February in response to concerns about border security, illegal immigration and fentanyl smuggling. That took observers by surprise, but many assumed it was the usual bluster. On 1 February he signed an executive order following through on his threat with a 25 per cent tariff due to go into effect on 4 February. But on 3 February, after phone calls with the leaders of Mexico and Canada, those tariffs were suspended for a month. After a few days of panicked reaction, investors relaxed and assumed the old first term playbook was still working. Yet on 4 March the tariffs were implemented. In response to panicked meetings between the White House and executives from the big Detroit car firms, Ford, GM and Stellaris, were granted a 30-day exemption on 5 March. The next day goods compliant with the United States Canada Mexico Trade agreement (USMCA) – negotiated in Trump’s first term and covering about 40 per cent of Canadian exports to the US – were also granted an exemption until 2 April. But for a few hours on 11 March, Trump threatened to raise the tariff on Canadian steel and aluminium to 50 per cent, posting on social media that he “would make all tariffs, and everything else, totally disappear” if Canada were to join the US as its 51st state. Yet he backed down on the steel and aluminium hike the very next day.
No one quite knows if the automaker or USMCA-compliant goods exemptions will be renewed or not in April. Just as no one is quite certain exactly what the reciprocal tariff package Trump has promised will contain. The result is extreme uncertainty, something which neither financial markets nor business executives like. Measures of economic policy uncertainty in the US have shot up in recent weeks to the kind of levels not seen since the early days of the pandemic or the financial crisis of 2008-09. That in and of itself does economic damage. Such high levels of policy uncertainty, as Britain discovered between 2016 and 2020 whilst parliament debated various forms of Brexit, are usually associated with delayed or cancelled investment plans from firms and paused hiring decisions.
Alongside this uncertainty comes the damaging impact of the tariffs themselves, not to mention the effects of retaliation by US trading partners. The immediate impact to the American economy will be price rises in the sectors hit and weaker output growth. For some firms, with complex cross-border supply chains such as car makers, the hit will be larger still. The reality that tariffs bring disruption and increased costs, rather than an easy win for the administration, seems to be slowly sinking in even for Trump. He admitted to Congress on 6 March that his trade policy would cause “a little disturbance” but insisted that the short-term pain would be worth it in the long run. His ultimate hope is that tariffs will both fill the US coffers, allowing cuts in other taxes, and encourage jobs to return to the US. The tariffs may indeed lead to more manufacturing taking place domestically but at a cost of higher prices overall. And importantly, the “little disturbance” will last for years. One cannot uproot an entire supply chain in a matter of weeks and months.
The results of the trade policy rollercoaster, together with a blizzard of other executive orders, can already be seen in US indicators. Business and consumer confidence have sagged, and the S&P 500 has shed 10 per cent of its value. US economic growth looks to be slowing with one indicator closely watched on Wall Street, the so-called GDPNow estimate compiled by the Atlanta Federal Reserve, pointing to a contraction in the first quarter. That may be overdoing it. Imports surged in January as firms attempted to front-run tariffs by importing more goods than required before they came into force. This widened the trade deficit but should reverse in the coming weeks providing some support for US growth. The S&P 500 may have hit the somewhat arbitrary 10 per cent down level – which analysts refer to as a market “correction”, or notable drop – but it is still more than a third higher than it was two years ago.
There is no doubt that the abrupt swing towards high tariffs will hit growth this year but something bigger looks to be happening in the background. The economic weather has turned nasty but the economic climate may also be changing.
While American shares have slipped, those in Europe have had a roaring start to 2025. For well over a decade the talk in markets has been of American exceptionalism, of how US dominance in the tech sector, the industry of the future, would power American profits and investor returns ahead of their peers. More importantly, the dollar, which Trump supporters had predicted would move higher, has slipped in recent weeks. Usually when wider financial markets are in trouble, the dollar climbs. It is, and has been for decades, the ultimate safe port in a storm. The place where panicking investors park their cash when they are fearful. US government debt might not offer the most exciting returns but it is seen as essentially almost risk-free. It is the default place in the global economy where value can be stored if there are no better alternatives, a large liquid market capable of absorbing immense flows of savings.
It is hard to overstate how crucial the dollar is to the global financial system. It is not too much of an exaggeration to argue that the global financial system is really a dollar financial system. According to the International Monetary Fund (IMF), 57 per cent of global official reserves held by governments and central banks are in dollars, well outstripping the weight of the US in the global economy.
With US debt high, the annual deficit wide and likely to widen further as taxes are cut, and with institutional checks and balances that usually constrain a US president being torn up, some are beginning to question whether the safe-haven status of US government dollar debt is really sustainable. Slowing US growth will only add to those questions. Then there are the financial ramifications of an America First foreign policy. American economist Barry Eichengreen is not the only scholar to have noted in the past that countries tend to hold a greater share of their reserves in the currency of nations which provide them with security guarantees. As those security guarantees come under question, money may begin to search for a new home.
One reason that the dollar’s role in global finance has appeared so entrenched has been the lack of an obvious alternative. The Euro may be the currency of a large chunk of the global economy but the stability of the currency area was sharply challenged by the debt crisis of 2010-2012 and Germany, the largest player on the continent, has long been a parsimonious issuer of government debt. That too though looks to be changing. The new German government is seeking to borrow one trillion euros in the coming years to fund rearmament and infrastructure programmes, due to Trump’s isolationist position. The questioning of the role of the dollar and United States Treasury bonds in global finance is taking place at the same time that a potentially viable alternative is emerging.
The global role of the dollar has long handed immense economic power to the US. It underpins the American ability to enforce sanctions on its enemies and insatiable global appetite for American government debt has both held down US interest rates and allowed the country to run large government and trade deficits for decades without worrying about the consequences. The very fact that market participants are discussing the loss of safe haven status would have been almost unthinkable a few years ago. Shifts in the climate are harder to spot than shifts in the weather, and take much longer to play out. But the long term effects of the second Trump administration risk being far more seismic than any slowdown in US economic growth in 2025. A world in which the global financial system is not anchored around the US dollar is one in which the United States holds measurably less global power.
Duncan Weldon is an economist and writer. His next book, “Blood and Treasure: The Economics of Conflict from the Vikings to Ukraine”, is out on 5 June.
[See also: The return of America First]
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