Geo-political

It is reported that Henry Kissinger said:

“Being an enemy of America is dangerous, while being a friend is fatal.”

How prophetic are these words as the Trump Administration applies 25% tariffs on Mexico and Canada products while threatening to takeover Greenland. All three are friends of the USA.

While America goes down the protectionist route, as we reported in Newsletter dated 29 November 2024, China has gone the opposite direction removing all tariffs on African countries.

In newsletter dated 29 November 2024, we also outlined that the US Biden administration did not speak with any senior Russian officials in nearly 4 years, and the Russian Ambassador to the USA had returned to Russia. It is reported that US Secretary of State, Blinken had refused to take phone calls or meeting requests from Russian Foreign Minister Lavrov. It is pleasing to see that the new US Secretary of State, Rubio recently met with Russian Foreign Minister Lavro. Apparently, the meeting covered much more than the Ukraine war. It is important that there is dialogue even with those countries you have major differences to avoid inadvertently stumbling into war.

Macro-economic

Over the years we have been writing about the transformation of the global economy and steps taken by the West to protect its hegemony and those taken by Global South countries in reply. The most important is the Global South’s move away from trading and financing transactions in US dollars and their repatriation of assets, e.g. gold, or sale of US treasuries, held overseas to prevent them being confiscated, and lessening the impact of sanctions by circumventing the US controlled SWIFT system. Just like a river in flood these steps are gaining momentum. 

Macro-economic: Changing World Trade Flows

According to 2022 figures from the World Integrated Trade Solution, China dominates the export market in world trade as these statistics reveal. 

Exporters: China 14.58%, US 8.31%, Germany 6.25%, Japan 3.48% and South Korea 3.23%.

Importers: USA 13.53%, China 8.75%, Germany 6.32%, Netherlands 3.43% and France 3.23%.

In 2024, China’s exports to America represented 15% of their total exports. This has fallen from 20% in 2018, as China increases its trading across the globe with more than 50% of China’s trade being with the Global South and BRICS countries. In December 2024, China exported USD137 billon to Global South countries and USD108 billion to developed markets (including Australia), and this trade to Global South countries being in US dollars, Yuan, or those countries local currency. The trend continues to be away from transacting in US dollars. With China removing tariffs on African countries along with a growing consumer population in Global South countries, China’s trade with those countries will continue to increase as a proportion of its overall trade with the West’s share decreasing. Diverse trading arrangements will make China less susceptible to economic downturns both in the West and the Global South, and the impacts of sanctions and the effects of conducting trade using only US dollars. Similarly, trading in local currencies reduces the risk of importing externally driven inflation, (i.e. inflation in the US or third countries that are not party to the bi-lateral trade) which comes when trading in US dollars. 

In December 2024, the USA trade deficit increased again which may reflect US importers stocking up before the tariffs were introduced on 1 February 2025. It will be interesting to see tariff impacts and early trends, once the figures become available. President Biden introduced 100% tariffs on Chinese Electric Vehicles (EVs) which President Trump has increased to 110%. In newsletter dated 29 November 2024, we also reported that Australia is no longer considered a primary trading partner of China, as part of China’s shift to increasing trading with the Global South. The slump of 23% in BHP’s interim result published on 18 March 2023 reflects this, as well as a reduction in local Chinese demand. The BHP interim dividend of USD0.50 cents is at 2019 level, as did Rio Tinto’s.

What is President Trump’s tariff strategy?

All countries employ different forms of protection, including tariffs (where consumers pay), subsidies (where taxpayers pay) and rebates (where taxpayers pay). The international protection debate has focussed purely on tariffs and not the overall costs of the different forms of protectionism strategies adopted. Retaliatory tariffs are common practice.  

President Trump wants manufacturing to return to the US. The threats to Canada and Mexico shows that he does not support friendshoring. Will this strategy work?

America is a high cost of production economy, this is why manufacturing in the 1990s and 2000s moved from America to lower costs of production economies, e.g. China, India and Vietnam. 

Production costs may be categorised into energy, labour and raw materials. In all 3 categories, American costs are much higher than its trading partners, so the only strategy available to President Trump is tariffs and based on economic orthodoxy they do not work.

Is President Trump just using tariffs and other threats as a negotiating point to force its trading partners (European Union, China, UK, etc.) to buy more American product or buy more US treasuries?  Time will tell if President Trump’s objectives will be realised. It will drive more countries to choose between America and the Global South, with many countries, e.g., Turkiye, Saudi Arabia, etc. walking a fine line in maintaining a foot in each camp. 

As noted above, we have been writing about the changes occurring across the world for some time now, with many being driven by BRICS, US sanctions and the confiscation of Russian assets by “the West’.  President Trump threatening BRICS shows that the US is concerned about the shift by the Global South away from the “the West”, and President Trump’s threats will accelerate de-dollarisation and the rush to gold. 

Global Interest Rates

With inflation being reported as retreating central bankers across the globe are reaching for the monetary policy lever. Cash rates have fallen as follows:

1. USA 4.50% down from 4.75%

2. UK 4.50% down from 4.75%

3. Brazil 13.25% up from 12.25%

4. Canada 3.00% down from 3.25%

5. China 3.10% down from 3.35%

6. EU 2.90% down from 3.15%

7. India 6.50% up from 6.25%

8. Japan 0.50% up from 0.25%

9. Russia 21.00% up from 19.00%

10. Swiss 0.5% down from 1.00%

11. Turkiye 45% down from 47.50%

12. Australia 4.10% down from 4.35%.

With a few exceptions, Brazil and Russia, the cash rate trend is down while the longer end of the yield curve, (e.g. 10-year rates) the trend is up as yield curves revert to more normalised shapes. Given the high levels of national and budget deficits of major economies the yields on long dated treasuries will likely increase not only in the USA, but across all developed nations with high levels of debt. This is because governments must offer higher returns (yields) than the inflation rate to attract buyers of their bonds.

In 2025, the US Federal Reserve must refinance or issue new securities worth nearly USD9 trillion dollars. With China, Japan, and now many other countries not buying or limiting their exposure to US treasuries, as part of their de-dollarisation strategy meaning yields will need to rise to attract investors, or the US Federal Reserve will buy the paper (print money) increasing their balance sheet again and fuelling inflation. As reported in newsletter dated 15 January 2025, even though the US Federal Reserve reduced the Fed Funds Rate by 1% the longer dated 10 year US treasury rate increased by 1% attract buyers.

Department of Federal Efficiency (DOGE)

Argentina is a case study in DOGE despite the economic differences between the US and Argentia. Notably, Argentina’s inflation rate 18 months ago was around 300%, whereas the America’s inflation rate was closer to 10%. Also, the US has the world’s reserve currency and can rely on money printing which Argentina cannot.

President Milei has taken a chainsaw to “Big Government” by closing government departments and sacking staff. Inflation has fallen from around 300% just over 18 months ago, to a monthly rate of 2.2% in January 2025 which is still too high. It is predicted to fall much further bringing it into line with OECD countries. The Argentina’s government budget is in surplus for the 1st time in many years. There is still a way to go on this re-structuring program, and even with the unemployment pain which impacts a few, it is better than high levels of inflation that hurts everyone.

President Trump has outlined a goal of reducing the US Federal Budget deficit and adopting President Milei chainsaw approach with Elon Musk in charge. This is a very difficult task given that most of the US Federal Government revenue goes to social security, interest on its borrowings and the military. 

One area targeted for savings is the US Federal Government that many say is fat and bloated. If the Federal Government workforce is reduced between 5 to 10%, the savings are a drop in the ocean and will be more than offset by the increase in expenditure on the US military and interest costs (see above). Can the US replicate what Argentina is doing?

In summary, events across the globe are moving quickly and will continue to do so. The world is awash with high levels of debt with governments applying loose fiscal policies to support economic growth. Inflation appears to be sticky. World trade flows are changing, and the winners appear to be the Global South countries with their lower costs of production.

General Advice Warning: Any advice or information provided is general advice only and has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any General Advice provided, you should consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs. If you wish to discuss the contents of this newsletter, please do not hesitate to contact us.