GEOPOLITICS AND TRUMP´S TARIFFS / MACLEOD FINANCE

Geopolitics and Trump’s tariffs

Japan, South Korea, and China are fast-tracking a new trade agreement. America’s global economic influence will decline and the international role of the dollar with it.

ALASDAIR MACLEOD

Trump’s so-called Liberation Day last week was a clear statement of intent — the growing 100-year trend of the US intervening in other nations’ affairs is ending. 

It was this trend which led to America defeating communism and its dollar becoming the unchallenged international currency for international trade.

For now, everyone is concerned with the economic consequences. 

Will Trump’s tariffs lead to a renaissance for US industry? 

Or will it lead to trade wars and a slump? 

In the few trading sessions following Liberation Day, the markets have voted with an emphatic thumbs down.

Ever since Trump campaigned on a tariff platform, I have made my views known and laid down the likely economic and monetary consequences. 

We must now turn our attention to the geopolitical implications of US autarky. 

Whether they trade with the US or not, every nation will be considering its future trade alliances, including which great powers will serve their national interests best in future.

Decisions are being taken which will determine the future of every nation, some with clarity and others dithering. 

These discussions over individual national interests will have been going on away from the public eye at least since the US presidential election last November. 

And they would have included the consequences for foreign relations.

Nowhere would these preparations have been more focused than in discussions between China and Russia, whose long-standing ambitions have been to remove from Asia and their allies elsewhere America’s hegemonic influence and its dollar. 

With Russia sanctioned, it is up to China to take the lead in anti-American trade policy.

Trump’s liberation day was 2 April and China was already prepared with a press release three days earlier:

“The three nations announced on Sunday that they have agreed to accelerate negotiations on their trilateral free trade agreement and enhanced cooperation in supply chain management and export controls according to China’s Ministry of Commerce.”

China Daily, 5 April

With China jointly leading BRICS and the Shanghai Cooperation Organisation, bringing Japan and South Korea into a combined Asian sphere of influence is a major coup for China. 

Effectively, it leaves the US isolated (its choice) and Europe struggling to agree its geopolitical position in global trade. 

Their combined advanced commercial technology is almost certainly better than that of the US, and Russia’s hypersonic missile technology is as well.

China’s objective is clear; that is to separate Japan and South Korea from American domination. 

With trade talks between these parties having been in the works for some time, Trump’s liberation day has suddenly made the mutual benefits clear and urgent.

Others will want to turn their backs on the US and join this alliance for similar reasons. 

The rest of Asia not in BRICS or the SCO are almost certain to join in. 

Indonesia (additional tariffs of 32%), Thailand (36%), Malaysia (24%), Cambodia (49%), Bangladesh (37%), Sri Lanka (44%), Myanmar (44%), Laos (48%), and Vietnam (46%) are highly likely to join in. 

Even Taiwan (32%) is likely to be reconsidering its options.

The alternative to US tariffs is an Asian-led tariff-free trade area covering most of the rapidly developing world. 

All of Africa, the Middle East, the rest of Asia, and when America weakens South Americans too will be ready to jump ship.

With her exports to the US at only 2% of her economy, China already exports more to BRICS members. 

And her imports from the US are relatively negligible anyway, so China’s tit-for-tat tariff response will have limited impact on her own domestic economy. 

Far more important is that China produces a large majority of the world’s rare earths, and the US imports about 70% of its rare earths from China. 

Seven categories of medium and heavy rare earths, which are crucial to the US economy are now on China’s export control list.

Some say that rare earths’ restrictions are a negotiation tactic. 

Already, Trump initially backed down saying his tariffs against China might be subject to negotiation before threatening to double them. 

But does China really care? 

The art of the deal is to deal from strength and Trump is not there.

The dollar’s future

In trade terms, the world has long been dependent on the US and its dollar, and it is that which is now changing irrevocably. 

The implications for it are that the day when the dollar will be replaced as the principal trade settlement currency for the majority of the world’s population is much closer. 

All that is needed is a replacement for it and we know that this is already a topic of discussion between China and Russia.

In large part, how matters evolve for the dollar will determine this outcome. 

But in the nearer term, there are too many dollars in circulation given the recessionary implications of Trump’s tariffs on global trade. 

The dollar’s trade-weighted index is already beginning to reflect this as the chart below confirms:

Furthermore, foreign portfolios possess over $14 trillion in US equities, and they have also been avid buyers at the top of the bull market. 

Quoted in Morningstar, economist Ed Yardini who has crunched the numbers said that “[foreign] buying has a record of being a contrary indicator.” 

Now that the market is crashing, these weak holders are bound to panic, selling equities indiscriminately and the dollars raised as well.

This analysis confirms the immediate bearishness of the TWI chart above. 

Consequently, higher interest rates will be required to stabilise the dollar, at a time of a widespread economic slump for the US economy. 

Europe, South Korea, and Japan face a similar outlook due in large part to Trump’s tariffs and the tariff responses which seem sure to follow.

It is an outlook which divides the world into two parts. 

There is the old, dollar-based financialised one which is dependent on financial speculation for its wealth generation rather than honest production, and the new which is enjoying an industrial revolution with genuine economic progress. 

And it is the latter which is attracting South Korea and Japan away from the US’s declining sphere of influence.