Recession or New World Order? Only One Thing Is Certain in Trump's Trade War

President Trump's liberation day saw the U.S. impose a minimum 10% tariff on all countries, and even higher tariffs on goods from about 60 countries that have a sizable trade deficit with the U.S. 

These include the EU with 20%, Vietnam at 46% and Thailand at 36%, to name a few. China saw an additional hit of 34% tariffs but including the previous 20% — the total tariff on Chinese imports rose to 54%. 

But when Trump decided to pause all reciprocal tariffs for 90 days, China was the exception as he raised its tariffs to 125%, which was followed by China increasing it to 84%. 

The tit-for-tat trade war continues today and, as it stands, the U.S. is paying about 125% tariffs on Chinese-imported goods, and China is paying the equivalent of 145%. Needless to say, the percentages do not matter as trade between the two countries has come to a standstill. 

What is going on? And is the U.S. being too harsh here? 

The mainstream media and tabloids will paint Trump as the reckless and fickle "orange man," throwing tantrums trying to get his way. When one tries to change a system that has been in place for decades, one gets to be very unpopular, as no one likes change. And certainly not when countries have been benefitting from the U.S. importing their goods for years while paying more or less nothing to import U.S. goods in exchange. 

In good times, these things don’t matter. But before Trump took office, the U.S. debt was on an unsustainable path with its national debt growing $1 trillion every 100 days. This tied his hands in being able to engage in any fiscal expansion plans. 

So, the U.S. is trying to raise funds to be able to offset its deficits and spending. We all know how bloated the federal government had become — there in came DOGE. It targeted about $1 trillion in savings, but it managed about $160 billion in federal mass layoffs. NATO is another example, whereby the U.S. contributes about 16% of NATO's common funding, and its defense spending is about 3.5% of its GDP, versus Europe at about 1.3% on average. 

For decades, the U.S. has been doing all the heavy lifting while Europe was focusing more on its welfare state and inefficient energy transition plans. China may claim it has all the cards but Chinese ports are at a standstill, with containers piling up and ships cancelled. Air freight is down 90% and factories are quiet, trying to find ways to divert their exports via other countries, which Trump has slapped tariffs on as well, to avoid evading them as in the past. 

China is trying to gain Europe as a partner by appeasing it and creating an avenue away from the U.S. Last year, the U.S. imported approximately $438.9 billion worth of goods from China versus China importing just about $150 billion worth, so clearly China needs to meet this void. 

It does not happen overnight and, while Europe may feel it is being deserted by its ally, it needs to think carefully about getting into bed with its adversary, which will not be any cheaper than sticking with the U.S. If only it thought out of its burdensome regulatory and bureaucratic ways. 

One thing is certain: the old days of negligent tariffs are gone, and investors will need to understand what that means for the economy and demand. Contrary to media and popular convention, tariffs are not as inflationary as first thought, as prices fall and so does demand as the companies and the consumers may not be able to consume the same way, leading to lower goods prices and an economic slowdown, rather than stagflation as such. 

Will we enter a recession, or will China and most partners concede to a new world order, whereby global supply chains are going to change and the world will move into a more multi-polar dynamic? Time shall tell, but after the market's 10% bounce from the lows, and with companies unable to plan for the future, it remains to be seen how long it takes for either side to blink.