Markets are moving much faster now than during COVID-19 and, for that matter, the Global Financial Crisis. While volatility presents opportunities, most of this is caused by President Trump’s policy agenda.

This article attempts to explain Trump’s policy agenda and why this is occurring.

Trumps policy agenda: Currently, people are confused by the amount of news flowing out of the US, particularly how it all fits together. This is how we think about the situation:

First principles – why is Trump doing this? Trump’s MAGA (Make America Great Again)  policy is intended to deliver the US more equitable relationships with other countries worldwide. This means reduced trade deficits with countries such as China and less reliance on US funding of organisations such as NATO. This will allow the US to rebuild some of its industrial and manufacturing bases, particularly in sectors deemed critical for things such as defence. This should help rebuild employment prospects for middle America and put the US on a more sustainable fiscal path with 3% fiscal deficits and 3% GDP growth.

So, what does Trump need to do? A country’s balance of payments comprises of two parts – the current account (trade deficits/surpluses with other countries) and the capital account (net capital flows in or out of the country). The two must balance. The US has been locked in a cycle of ever-increasing imports from countries such as China for decades. These imports are paid for in US$. China then uses that US$ to buy US treasuries, which pushes up the US$ and makes US-made products more expensive than imports – and so the cycle repeats. So, Trump needs to focus on restoring balance to both trade imbalances and capital flows.

How has he done this so far?

1. The first thing that Trump did was strike a deal with Saudi Arabia, where the US would (amongst other things) continue to provide defence support while the Saudis would increase oil production. There is a high correlation between oil prices and US inflation (both from direct and indirect impacts), so it made sense to reduce inflationary pressure first before undertaking further policy action.
   
   
2. Trump then instigated a series of Tariffs which sought to “level the playing field”. For a long time, the US has suffered from other countries imposing higher tariffs or more restrictive trading conditions. The US currently imposes tariffs of around 4.0% on agricultural products and 2.1% on non-agricultural products. In contrast, countries like India have higher average tariffs, with rates around 12%. The WTO reported that in 2023, China’s average applied tariff rate was 7.5%, with agricultural products averaging 14.0% and non-agricultural products averaging 6.4%.  The US has suggested that it is not just looking at absolute tariffs, it will look at the overall magnitude of trade imbalances it has with countries, tariff differentials, other tax differences and non-tariff barriers such as currency manipulation or unfair government funding and suppression of labour costs. This will help the US industry rebuild, particularly in critical areas, but also means that other countries (particularly China) will be incentivised to stimulate their own economies and domestic consumption. The US is expected to add further tariffs on China in particular.
   
   

   The administration has also discussed plans to terminate the 1984 US-China tax treaty. Currently, Chinese government entities (who hold almost $2 trillion in US assets) pay zero tax on portfolio income from US investments. At the same time, bond interest is exempt from withholding for all Chinese investors. Terminating the tax treaty would restore the statutory 30% withholding rate on Chinese investments – a dramatic shift that would fundamentally alter the economics of Chinese capital flows to the US. The language of the US administration is explicit: “That tax treaty…led to the deindustrialisation of the United States and the technological modernisation of the PRC military. We will seek to reverse both those trends.”

3. Trump also sought to increase Europe’s contribution to NATO from c1-2% to around 3%. He threatened tariffs and created uncertainty about the US’s unlimited support of European defence following meetings with Ukraine’s president Zelensky. As a result, Germany is now proposing 400bn Euro extra spending on defence plus a longer-dated 500bn Euro spend on infrastructure. The UK and France are proposing smaller but significant accelerations of defence spending. The European Commission is talking about an 800bn Euro “Rearm Europe Plan” using emergency powers under their articles of treaties.  This is positive because it delivers a more equitable relationship to the US with Europe’s increased funding of NATO while also providing export opportunities for defence hardware. Over the longer term, the US should benefit from having stronger economic growth in Europe, which may provide broader export opportunities.
   
   
4. Japan increased rates last August and looks set to do this again as its inflation remains high. While not an outcome of Trump’s policy, the increase in Japanese interest rates puts pressure on “the Yen carry trade”, where yen has been borrowed at low interest rates and converted into US$ to buy US assets. That has put upward pressure on the US$ and entrenched the competitive disadvantage that US exporters faced as a result of their strong currency. This will create volatility (as it did last August) in the short term but removes a key driver of the imbalance in the US’s capital account.
   
   

   Putting this together: As we look through this period of volatility, the longer-term macro-outlook is potentially much stronger. The European economy has been very weak for around 15 years; however, we should see stronger growth with increasing stimulus. Asia has also suffered prolonged weakness following the burst of China’s property bubble. There is no doubt that there should be more stimulus, which will be an incremental positive for China and Asia in general. Trump’s domestic policy of deregulation, lower taxes and lower energy prices is very positive for small and medium-sized businesses. We expect the US economy to remain strong. And if the US does weaken, the Fed will have plenty of room to cut rates.

Domestically, we are finally seeing growth after three years of earnings downgrades on the ASX. Both political parties are spending, which will drive growth, and the RBA is expected to cut rates again in 2025. So, following the current volatility, we may end up in a position where European growth accelerates, Asian growth accelerates, US growth remains solid, and Australian growth picks up. That could happen while interest rates come down slightly.

If the Trump experiment comes to pass, this will be a very positive outcome.