The United States in particular has been making headlines of late with sweeping tariffs and “reshoring” initiatives designed to bolster its domestic industries. Combined with these tariffs, at an average of 22% across the board on imports, are at levels not seen since 1910. Like CHIPS, the U.S. government is already taking steps to rebuild its manufacturing base. This push dramatically impacts global trade patterns and realigns economic ties across the globe.
Besides the tariffs, the U.S. dollar is charting some choppy waters. Worries about the U.S.’s go-it-alone, unilateral approach might put America’s long-term dominance at risk. When the stress hits the markets, it’s the dollar that actually gets stronger due to its role as a safe haven. This counterintuitive paradox prompts inevitable speculation about the dollar’s long-term future as the bedrock of international finance.
The Regional Comprehensive Economic Partnership (RCEP) is another huge trade bloc, but this one is spearheaded by China. It now counts 15 countries as members, including key U.S. allies like Japan, Australia and South Korea. The U.S. is administering its tariffs with an iron fist. In tandem with this, it is enforcing the law by closing loopholes which allow countries like Vietnam, Thailand, and Mexico to act as transshipment hubs. This misguided decision will only deepen rifts in our trading partners’ relations.
Impacts of Tariffs on Global Trade
Averaging 22% on imports, these tariffs are some of the highest in over a century. This will require them to move their supply chains and drastically alter their trading relationships. This is particularly the case for foreign countries that send products to the U.S.
Countries such as Vietnam and Thailand that have recently been utilized as transshipment points to evade tariffs now feel the impacts directly. Fortunately, the U.S. government is finally working to close these loopholes, so that imports from these nations will begin facing tariffs as well. That would only result in much higher costs for American consumers and businesses that depend on imported materials.
In addition, European exports would be harmed by the imposition of these tariffs, which would likely have the secondary effect of further weakening the euro. The concern in the EU is how vulnerable they are to the whims of changing U.S. policies. To prevent its industries from being harmed by abrupt changes in US trade policy, the EU is demanding “greater strategic autonomy.”
The Dollar’s Dual Role in Global Markets
The U.S. dollar finds itself in a tricky situation during these increasing trade hostilities. Unilateralist America will long be remembered for seeding the ground for the first serious challenges to dollar dominance. The dollar remains king of the currencies when the markets stem from periods of contagion. Traditionally, investors would seek the dollar as a safe-haven asset and the dollar would appreciate, even during times of extreme economic uncertainty.
This complex, sometimes contradictory, dual role of the dollar comes with equal challenges and opportunities in global markets. On the one hand, a strong dollar helps stabilize U.S. government bonds through flight-to-safety inflows, thus preventing yields from rising. This strong position of the dollar can make it particularly difficult for other currencies. That’s no small thing, particularly in areas most acutely affected by U.S. tariffs.
The Chinese yuan faces depreciation pressures as Beijing attempts to offset the impacts of U.S. tariffs while avoiding destabilizing actions that could further complicate economic relations. The bond markets in each of these countries display these tensions. When trade threat escalations roll through the system, the typical behavior is for safe sovereign bonds, including U.S. Treasuries, to rally.
Gold and Alternative Currencies
With trade conflicts simmering, uncertainty often drives investors to “safe haven” commodities, such as gold, pushing prices up. According to historical trends, gold tends to rally in times of heightened trade tensions. Depending on the severity of these tensions, analysts are forecasting gold to hit possible multi-year highs. Investors may seek refuge in gold as an alternative store of value amidst uncertainties surrounding traditional currencies like the euro and yuan.
Additionally, if inflation or credibility shocks affect the U.S., the euro may find itself repositioning as a relatively stable currency in response to changing market conditions. Given the ongoing, unpredictable trade disputes, we’re likely to see these types of situations shape perceptions about how stable and reliable various currencies are.