In recent weeks, analysts have observed a significant recovery in US equities after a sharp decline, effectively closing the performance gap with European equities. This assessment is accurate when considering each region’s equity indices in their respective currencies. However, when European equities are evaluated in US dollars, their performance appears superior to that of US equities, largely due to the rising values of the euro and the pound. This trend reveals that global investors seem more pessimistic about the economic outlook for the US compared to Europe, potentially driven by ongoing anxieties surrounding trade wars.
Interestingly, despite the unfolding trade conflicts, US investors have maintained a sense of relative calm since late April. The spread between junk bonds and Treasury bond yields, which surged in April, has stabilized around levels not seen since February. This indicates a perception of only modest risk associated with the current climate, although recent trade-related announcements and escalating threats suggest that the trade conflict is far from abating.
One potential factor for the resilience shown by US investors is optimism surrounding the implications of the “One Big Beautiful Bill,” which aims to lower effective corporate tax rates. However, there is a flip side; if this legislation leads to increased borrowing costs for corporations, it could adversely affect them. Additionally, some investors may have expected the trade war to inflict negative economic impacts by now. Nevertheless, the US economy remains robust, with low inflation rates persisting. Indeed, future inflation expectations over the next five years remain relatively subdued, but it is essential to note that the adverse consequences of the trade war could take time to materialize.
Despite President Trump’s threat of imposing a staggering 200% tariff on pharmaceutical imports and a 50% tariff on copper, the US equity market showed little reaction. This suggests that many investors interpret Trump’s threats merely as a negotiating strategy rather than genuine intentions. Consequently, some investors choose to disregard trade news and focus on other market factors. However, it is worth noting that historically high tariff rates remain in place, which, over time, are likely to exert a negative influence on equity valuations.
On the other hand, not all market participants have ignored the potential ramifications of the president’s comments. For instance, copper prices surged approximately 10% in just two days in response to the proposed tariff. This increase is significant given that copper is a crucial component in many products and industries. A 50% tariff on copper imports, if enacted, could dramatically raise production costs for a variety of key products. Despite this, a recent poll of equity traders found that the majority expect the average US tariff rate to remain below 18% following an upcoming deadline on August 1 for establishing tariff rates. This outlook is relatively optimistic, particularly since current average tariff rates hover around the 18% mark. Even if traders’ expectations hold true, that would still result in tariffs at levels not seen in the past 90 years, with less than 5% of traders anticipating rates dropping below 10%.
Traders also seem to overlook the uncertainty stemming from fluctuating tariffs. Since early this year, the trading environment has been marked by threats of tariffs, imposition of tariffs, reversals, and delays in decision-making. This uncertainty complicates strategic planning and investment decisions, leading some companies to defer actions until greater clarity is achieved. If numerous companies opt for postponement, this could adversely affect overall business investment and, subsequently, economic activity at large.
Ironically, with stock prices buoyant and bond yields alongside the dollar remaining relatively stable, the pressure on the administration to reverse its stance on tariffs has lessened. Recall that in early April, following the announcement of exorbitant tariffs, the US equity market experienced a significant decline, prompting the administration to postpone tariffs while negotiations were underway. Now, with final tariff rates expected before August 1, investors should prepare for a potential shift in market expectations.
The trade war has escalated, as evidenced by the US’s inclination towards implementing sustained, very high tariffs. The three trade agreements reached to date—with the United Kingdom, Vietnam, and China—have resulted in historically high US tariffs, which could serve as a template for future agreements with other nations. While the definitive assessment of tariffs has been postponed until August 1, a new framework for US relations with the global community is beginning to take shape.
In particular, the recent communication from President Trump to South Korea and Japan indicates the US’s intention to impose a hefty 25% tariff on imports from these countries unless they alter their trade policies—without specifying what those changes might entail. Currently, the US maintains a free trade agreement with South Korea that took years to negotiate and was approved by Congress. New tariffs would essentially end that agreement. The prospect raises the question of what, if any, concessions South Korea could offer to appease the US administration. However, it appears that my assessment suggests no viable options exist.
The letter sent by President Trump highlights the US’s bilateral trade deficit with South Korea and urges Korean firms to invest more domestically within the United States. This proposal implies that increased inbound investment would ostensibly reduce exports to the US. However, it is important to recognize that heightened foreign investment in the United States could ultimately lead to a larger trade deficit, as capital inflows and trade flows are inversely related. Additionally, the bilateral trade imbalance between two countries is not particularly significant; rather, the total trade imbalance of a nation is of greater import, and this imbalance is not solely the result of trade regulations. If South Korea finds itself unable to make meaningful concessions that satisfy the US, it will likely face high tariffs that would injure its own economy but impose greater burdens on US consumers. This situation might prompt US consumers to seek alternatives from countries with lower tariffs, an option that may not be available if the US secures high tariffs from multiple nations.
Reports suggest that Japan’s leadership is apprehensive about the impending 25% tariff on imports. Japanese leaders had hoped their robust economic and political ties with the United States would safeguard against significant tariffs. Japanese Prime Minister Ishiba has expressed this sentiment, stating that Japan is the world’s foremost investor in the United States and generates the most jobs—asserting that their situation is distinct from that of other countries. Clearly, this perception is proving to be inaccurate.
President Trump has also introduced the prospect of penalties against various nations, set to take effect on August 1, assuming no agreements are reached. Although there remains an opportunity for negotiations, the proposed tariffs are alarmingly high, mirroring the so-called “reciprocal” tariffs initially announced on April 2 but later postponed. If these new rates are executed, they will push the average US tariff level to heights unseen for over a century, likely disrupting both global trade patterns and cross-border investment flows. Furthermore, the proposed tariffs do not address the imminent possibility of additional industry-specific tariffs already being contemplated. It is crucial to note that a US court has ruled that several country-level tariffs are largely unlawful; should this ruling hold in higher courts, the administration may turn to product-specific tariffs as a primary tool for its trade strategy.
Should the average US tariff rate remain stable or escalate, it is poised to alter global economic dynamics. The resulting boost in US inflation is likely to be temporary. Additionally, this inflation uptick will impact the Federal Reserve’s monetary policy decisions. High tariffs will lead to reduced imports and erode consumer purchasing power, potentially decelerating US economic growth and prompting the risk of a recession. Conversely, for other countries, elevated US tariffs will likely motivate them to enhance trade with each other and foster domestic demand. Some nations may respond with retaliatory measures, as suggested recently by Germany’s chancellor concerning the European Union.
Focusing on Southeast Asia, it appears that the administration is gravitating towards very high tariff rates. This is significant because, in recent years, considerable investment that could have flowed to China has instead been redirected to Southeast Asia as companies sought to mitigate the risks associated with operations in China. However, reports indicate that the US administration is contemplating tariff rates between 25% and 40% on imports from nations such as Cambodia, Laos, Indonesia, Thailand, the Philippines, and Malaysia. Should such tariffs be imposed, the consequences would be substantial for US consumers who purchase numerous goods manufactured in these nations. Moreover, these high tariffs could severely disrupt established supply chains within the region.
Despite this, it is vital to note that these tariffs have not yet been solidified, as negotiations are still ongoing. The US administration recently reached an agreement with Vietnam, introducing a 20% tariff on imports from the country while allowing for a zero tariff on imports from the US. Whether this agreement will serve as a model for its neighboring countries remains uncertain. Even a 20% tariff presents significant challenges.
Leaders in Southeast Asia are beginning to respond to the potential backdrop of high tariffs. Malaysian Prime Minister Anwar has publicly criticized the new trade environment, asserting that tools once utilized to foster growth are now wielded as instruments of geopolitical rivalry. He has pointed out that tariffs, export limitations, and investment barriers have become sharp tools of contention. To mitigate the anticipated negative fallout on exports, Malaysia’s central bank recently instituted a 25 basis point cut in its benchmark interest rate—the first reduction in 25 months—to encourage domestic demand.
In Canada, trade relations between the US and Canada have returned to the forefront of discussions after a period of relative calm. Recently, President Trump stated that a 35% tariff will be levied on imports from Canada, excluding items covered under the free trade agreement between the two nations. However, the specifics regarding the exemptions may evolve as negotiations unfold.
Market reactions have been mixed following this announcement; US equity prices initially plummeted before experiencing a slight rebound, while Canadian equities followed a similar trajectory. The Canadian dollar experienced a sharp decline but subsequently rebounded due to growing speculation that the 35% tariff may not be enforced. Many traders perceive Trump’s threats as merely preliminary moves in negotiation tactics. Nonetheless, past resolutions of trade disputes with other nations suggest that the US intends to implement relatively high tariffs moving forward.
The proposed 35% tariff on Canadian imports represents an increase from the previously threatened 25% tariff earlier this year. Since that time, Canada has seen a change in leadership with Prime Minister Mark Carney, who has actively worked to mend ties with the United States; he even scrapped a digital services tax that had drawn complaints from the US administration. Yet, the latest announcement underscores that the tariff is partially hinged upon the issue of fentanyl. President Trump remarked that if Canada cooperates in addressing the fentanyl flow into the US, then consideration could be given to adjusting the proposed tariffs. He also warned that if Canada retaliates, the US tariff rates might escalate further.
While it is noted that the volume of fentanyl coming from Canada to the US has been minimal, the Canadian government has pledged to invest US$1 billion to combat the issue. Prime Minister Carney has asserted that meaningful progress is being made on this front. Ultimately, the outcomes of US-Canada relations will be influenced by the required review of the existing free trade agreement among the United States, Mexico, and Canada, scheduled for 2026. Changes to this agreement seem probable.
In Brazil, the US administration’s recent threats of a staggering 50% tariff on Brazilian imports have raised eyebrows. This tariff proposal is linked not to economic factors, but rather to political considerations surrounding the prosecution of former President Bolsonaro on accusations of attempting a coup. This scenario indicates that the current US administration views tariffs as a coercive tool to pressure foreign governments, regardless of the economic context.
It is improbable that Brazil will make concessions to satisfy President Trump. Following the tariff threat, the Brazilian currency experienced a sharp depreciation, alongside declines in Brazilian equity markets. Should a 50% tariff be instituted, the impact on the US economy would also be significant; Brazil serves as the country’s largest coffee supplier, and coffee futures soared in response to the US announcement. Furthermore, Brazil ranks as the third-largest consumer of US steelmaking coal. Brazilian firms process this coal before selling it back to the US, meaning that the potential tariff could subsequently increase operating costs for American steelmaking businesses. Brazil also exports numerous other products, including popular medium-sized airplanes used by US airlines for shorter flights. The consequences of implementing such a tariff could be far-reaching.
With regards to copper, the US government has proposed a 50% tariff on copper imports effective August 1. This indicates that the average US tariff rate, currently around 18%, is poised for a significant increase by the beginning of August. Historically, the average tariff rate was below 3%, prior to recent escalations.
The US relies heavily on imports for its copper consumption, sourcing about 60% of its needs from abroad, predominantly from Chile—a country with a free trade agreement with the United States. Approximately 40% of copper consumption is sourced either domestically from mines or through recycling of scrap copper. In anticipation of the impending tariff, the copper price surged as businesses rushed to acquire supplies. Copper inventories in the US have also skyrocketed, roughly doubling since the year’s start. This scenario raises concerns for China, the world’s leading copper consumer. Meanwhile, diversified mining corporations witnessed declines in their share prices, as they grappled with the anticipated disruptions in global copper markets.
image source from：deloitte
