As is custom, the new administration will have ambitious goals to achieve tangible outcomes in its first 100 days, so the speed at which President Trump has been signing Executive Orders is unsurprising. As part of this initial burst activity, we have seen the US withdraw from the Paris Climate Agreement and the World Health Organisation, the declaration of a national energy emergency, a rollback of electric vehicle targets, and a raft of measures relating to immigration.
Tariffs
What was notably absent from the first policy wave was any formal announcements on tariffs with President Trump opting instead to start dialogues with Mexico, Canada and China to address trade imbalances. This topic has spooked markets given the inflationary nature of higher prices.
It’s expected that a new tariff regime will differ significantly from the first Trump administration in 2017. For example, the inflationary impact for consumers back then was broadly offset by a combination of companies absorbing rising costs within their margins as well as the currencies of targeted countries weakening against the US dollar. This time round, the scale and breadth of the tariffs being discussed are so much greater that there will be little companies can do to protect their customers without materially eating into profitability.
While the administration’s opening gambit is to put 25% tariffs on Canadian and Mexican and 10% on Chinese goods imports, many expect this to be far from reality with cross-sectoral deals being struck in areas such as immigration, the illegal drug trade, and investment to avoid fresh trade barriers.
Inflation Reduction Act
One topic many clients have asked about and one that is often discussed in the market is around the implications for the Inflation Reduction Act (IRA). The IRA is one of President Biden’s flagship policies passed in 2022 with the stated intention of lowering prescription drug prices and investing in domestic energy production. Within this piece of legislation were provisions for loans and tax credits to spur fresh investment.
By Executive Order, President Trump has curtailed financial provisions for new loans made possible by the Act but has so far fallen short of being able to make any changes to the far more substantial tax credit provisions. This is in part due to the technicalities of the US tax code, and an inability to make complex changes (as would be needed) without new legislation.
Though Republicans have majorities in both the House of Representatives and the Senate, there is significant support amongst congressional Republicans for the IRA as the law has stimulated large amounts of investment in Republican states. This means there is an incentive for Republicans to deny the President Trump to make meaningful changes that would jeopardise investment and jobs amongst their voters.
In summary
It is clear that the America first programme being pushed by the new administration means the US is likely to be less present on the world stage. This risks significantly undermining multilateral bodies such as the World Health Organisation, the United Nations or indeed even the North Atlantic Treaty Organisation – which President Trump has been critical of for many years.
Many of the actions thus far appear to be setting the US on a new course, but it is important to remember the deal-making nature of a Trump-led White House. As we have seen just over this last weekend with the case of Colombia, we can very suddenly see escalation of threats ranging from tariffs to sanctions by the US, only to be followed by rapid de-escalation and a subsequent deal.
If history is anything to go by – or indeed this last weekend – we can expect tariffs and sanctions to be a major lever that is used in negotiations as the second term President begins to push his strategic ambitions.
For the rest of us, we can only set our aims towards the medium- to long-term, ignore the noise, and focus on themes and trends we believe will endure; technological advancement, energy transition, ageing populations, and ever-increasing needs for healthcare provision.
Any questions?
If you would like more information about EQ’s investment views and services, please get in touch.
Please remember, this content is provided for information purposes only. Investment involves risk. Past performance is not a guarantee or indication of future results. Investment return and the principal value of an investment may go up or down and may result in the loss of the amount originally invested. All investors should seek professional advice prior to any investment decision, to determine the risks associated with the investment and its suitability.
