The Phoney Presidency Is Over — Hello, Orange Wrecking Ball
The Phoney Presidency Is Over—Hello, Orange Wrecking Ball
“Trump may be one of those figures in history who appear from time to time to mark the end of an era and force it to give up its old pretences.”
— Henry Kissinger, 2018
On Monday, January 20th, America anointed the second coming of Donald J. Trump, the 45th and now 47th President of the United States. President Trump is the most erratic man ever to lead the US, and in keeping with that reputation, he has wasted no time in deploying aggressive tariff measures. Within hours of his inauguration, the White House announced an “Emergency Tariff Enforcement Memorandum,” setting into motion the very actions markets had feared—yet optimistically assumed might not come so soon.
Second-term presidencies can be even more unpredictable than first terms because the incumbent no longer fears re-election. Any notion that Trump might be constrained by the tech bros, particularly his new “best friend” Elon Musk, appears to be wishful thinking. Musk craves attention, Trump provides it, and together, they seem likely to stoke each other’s impulses rather than provide a moderating influence.
Decisive Victory and Sweeping Power
The 2024 Presidential election delivered a decisive win for Donald Trump and a clean sweep of Congress. This leaves few formal checks on the most volatile leader in American history. Trump would have been convicted had he lost the election; instead, he now has near-free rein. Public opinion might be the only real constraint, but American voters were fully aware of his record and rhetoric when re-electing him. Recent surveys reveal that many Trump supporters view the world as a zero-sum game, showing a willingness to back policies that harm them personally as long as certain other groups—or foreign nations—suffer more (a mindset not unique to the US, as Brexit demonstrated). Voter remorse, if it comes, likely will not happen until the mid-term elections in November 2026.
The Phoney War Is Over—The Real Tariff War Begins
Until the inauguration, Trump’s threats were seen by some as bluster. Now, the phoney war is finished. The Emergency Tariff Enforcement Memorandum announces immediate or imminent hikes on Chinese imports (10%, set to rise monthly), alongside a 25% tariff on Mexico and Canada, unless what the White House calls “unchecked immigration” is addressed. Trump calls himself “Tariff Man,” and his second administration seems eager to live up to that moniker.
There are three significant elements to these tariff actions:
- Economic Consequences
- Geopolitical Repercussions
- Historical Resonance
We will look at the first—the economic dimension—here. Future posts will explore the broader geopolitical and historical angles.
Tariffs and the Trade Equalisation Act
Trump’s first legislative move is likely to be the Trade Equalisation Act, designed to align U.S. tariffs with those of trading partners whose tariffs exceed the current U.S. rates. Although American tariffs have crept upward since Trump’s first presidency, they remain lower than many competitors. Take car imports: the U.S. charges 2.5%, while the UK—still largely following the EU’s tariff schedule—charges 10%. Britain may well match America’s 2.5% rather than accept reciprocal tariffs on its exports. This would be an easy win for the White House. Other nations are likely to be less accommodating, responding with rapid retaliation if provoked.
That said, the Trade Equalisation Act—expected to be introduced soon after Tuesday’s White House request—is a mere appetizer compared to the main course: punitive tariffs on Chinese exports and a blanket 20% rise on imports from most other countries. Trump claims a 60% tariff on Chinese imports alone, plus a 20% tariff on other imports, could raise $300 billion per year, offsetting the enormous costs of his tax plans. The Peterson Institute estimates that Trump’s second-term tax packages will raise Federal debt by $5.3 trillion—though some project anything from $3 trillion up to $8 trillion, depending on model assumptions. Either way, the administration insists tariffs will help bridge this huge gap.
Economic Modeling of the Tariff Impact
Bloomberg Economics, using the WTO’s global trade model, estimates U.S. imports might drop by 40% if China alone retaliates and by 55% if multiple nations follow suit. The immediate effect would be highly inflationary, driving up costs for American consumers. Tariffs act much like a supply shock, cutting potential U.S. output by as much as 0.8–1.3% by 2028 and reducing employment by 0.4–0.7%. Prices might rise by 4% if only China retaliates and by about 0.5% if other countries cut their own prices (and interest rates), depreciating their currencies in the process. The U.S. dollar has already appreciated since the election in anticipation of such policies. Naturally, these are model-based estimates, and “garbage in, garbage out” always applies, but they hint at potential stress points.
No model is perfect, especially as it tries to capture both new tariffs and big tax cuts. Of the $5.3 trillion in tax changes suggested by the Peterson Institute, $3 trillion merely extends existing cuts. Still, if Trump follows through on lowering the corporate tax rate to 15%, it could offset some of the tariff impact domestically. Markets currently perceive the dual effect of additional tax cuts and higher tariffs as inflationary, driving up Treasury yields and making near-term Federal Reserve rate cuts less likely.
Inflation First, Then Deflation
In the U.S., tariffs could spark inflation initially, but subsequent effects lean deflationary. Tariffs are taxes that redistribute income from consumers to relatively sheltered domestic producers. Because the consumer sector outweighs manufacturing, overall growth will likely dip—reinforcing the model’s forecast. Higher consumer saving rates may also shrink the trade deficit.
By far, the biggest casualties would be surplus economies. Trump’s threatened tariffs dwarf the notorious Smoot-Hawley tariffs of 1930, which proved devastating because the U.S. was then the world’s top surplus nation, and the economy was in a deep, post-crash slump.
Xi and China’s Reaction
China, which already appears to be in a virtual recession, stands most exposed. Property accounts for 60–70% of household assets, creating a shaky balance sheet. Growth has been propped up by artificial loan printing and overinvestment in manufacturing and infrastructure—projects unlikely to generate returns sufficient to cover their costs. High tariffs from the U.S. would accelerate China’s downturn, pushing it deeper into recession. Chinese exporters would be forced to slash prices to unload surplus goods on other markets. If those cut-rate exports failed to find sufficient demand, production would fall further, depressing China’s already frail domestic demand.
The intense competition resulting from the steep discounting of Chinese exports would drag down prices in Europe, Asia, and beyond. In response, the European Central Bank—and possibly the Bank of England—would need to cut rates faster than currently envisioned, putting further downward pressure on their currencies. This would, in turn, strengthen the U.S. dollar, eventually forcing American inflation to peak and allowing the Fed to resume cutting interest rates later in the year.
One might hope that the crisis pushes Xi Jinping to stimulate more domestic demand, rebalancing China’s economy away from its export-heavy model. But to paraphrase Winston Churchill, Xi can be relied upon to do the right thing—only after he has tried all the alternatives. In my cynical view, Xi will not make meaningful reforms in 2025, 2026, or likely for the rest of the decade. Worse yet, some of the policies he might try could do more harm than good.
Europe and the Demand-Suppression Dilemma
Europe also has a persistent current account surplus, led by Germany. It, too, needs to boost its own domestic demand—particularly by repealing or suspending the “debt break”—to cushion against global trade contraction. This is somewhat more likely than a major Chinese policy shift but still far from guaranteed. With prolonged coalition negotiations after the February elections, any reforms may only partially offset the worst effects of Trump’s tariffs.
For emerging markets, the combination of a strong dollar and reduced trade flows will likely prove painful. This is no small matter for countries heavily reliant on exports and dollar-denominated funding.
Sand in the Gears of Global Trade
On the broader picture, we have clarity on the key questions—who (Trump), why (Tariff Man and bully tactics), what (tariffs), where (focused on China but extending to other nations), when (already underway, with more to come soon), and how (emergency powers under the International Economic Powers Act plus legislation). We now also have a clearer sense of Xi’s reaction—or at least the likely economic fallout for China.
The incremental “boiling frog” strategy—raising tariffs by 2–5% in monthly steps—remains on track, letting industries adjust to each small hike. It spreads out the pain over time, possibly avoiding the political shock of a single large increase while also preserving White House leverage to pause or ramp up depending on what Beijing, Brussels, and other capitals do in response.
The Orange Wrecking Ball and Financial Markets
Tariffs are typically a negative-sum game for the global economy; the IMF projects global GDP could drop by 0.5% or more. Each retaliatory move from foreign mercantilist powers will likely amplify that downside. The U.S. might still be the “least bad horse in the glue factory” because of its relatively lower export dependence, but it will not escape unharmed. A stronger dollar and rising inflation could force the Fed to hold off on near-term rate cuts, only to pivot later once global deflationary forces take hold.
Despite the latest turmoil in UK bond and currency markets, Britain’s substantial current account deficit might somewhat insulate it from collapsing global trade—though it still faces growth of barely 1%, far too low to cover the country’s welfare costs and urgent investment needs. On the other hand, the genuine losers are likely to be China, Europe, Japan, and South Korea—the major surplus economies whose dependence on exports leaves them exposed to Trump’s tariff salvos.
If, by some miracle, these surplus nations responded by boosting domestic consumption, it could rebalance the global economy. Yet that outcome looks unlikely under Xi’s grip on the Chinese economy and a famously cautious European approach to fiscal expansion. Expect the second half of 2025 (and perhaps beyond) to be a testing ground for these theories.
Roller-Coaster Equities in 2025
Volatility in U.S. equities is almost assured this year. Since the financial crisis, market disruptions have increased in frequency but often burn out quickly—partly because institutions have built huge short-volatility exposures. Tariffs have the potential to provide that “major event” big enough to rattle complacency. We could see swings of at least 10% in both directions, and I still expect the market to finish the year lower than it started.
So, here we are, the day after the inauguration: the phoney presidency is indeed over, and the orange wrecking ball has begun smashing through the fragile framework of global trade. Whether this is a shrewd step toward “fairer” arrangements or simply mutual economic harm remains unclear. But one thing is certain: for better or worse, the era of measured, cooperative globalization that has characterized the post-Cold War order faces its most serious challenge yet.
Disclaimer: This commentary is the author’s opinion for informational purposes only, not investment advice, and it reflects developments up to Tuesday, January 21, the day after President Trump’s
Stuart Thomson
inauguration.
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