Photo: The Edge Malaysia
Most academics and economists are critical of tariffs, maintaining that there is no winner in a trade war. It is true. Global supply chains are optimised for costs and disrupting/breaking them must result in higher production costs, at least in the short term. So, yes, tariffs are inherently inflationary — American consumers will pay higher prices with fewer choices for goods. Some domestic manufacturers will enjoy better margins because they can now price their goods higher, comparable to pricier imports. But others that rely on imported parts and components will be hurt as tariffs render them less competitive globally. We think, on balance, US consumption will slow and US firms will suffer from weaker demand and/or lower margins and profits in the near term. Producers and manufacturers in the rest of the world will also have to share part of the tariff costs, the extent of which depends on their individual pricing power and demand elasticity. And that will lead to slower global economic growth. But …
Why, then, did we say the US won?
See also: Trumpianomics will benefit the US greatly for years to come
Because Trump’s tariff is not only about trade and trade deficits. Case in point: A minimum tariff of 10% is imposed on countries with which the US has a trade surplus. And tariffs were imposed indiscriminately, not targeted at specific industries but across the board on all goods.
As we have explained in great detail in our three-part series on Trumpianomics, tariff is one piece of a comprehensive blueprint to Make America Great Again (MAGA). We called it the MAGA Pathway (see Chart 1). We are not going to rehash everything here (scan the QR codes, if you wish, for a refresher), but, very briefly, tariffs have multiple main objectives.
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Yes, it seeks to address the US’ widening trade deficit with the rest of the world, to reduce imports and boost domestic production and exports. While it takes time to expand manufacturing capacity, companies can boost output in the short term — for instance, by running an additional shift. In the longer term, tariffs will encourage investments, by both domestic and foreign companies catering for the US market, which will create jobs for Americans and support economic growth.
But as we can all see, Trump’s trade deals encompass far more than just tariff rates. On top of pledges for more US purchases (boost exports), the trade frameworks with key trading partners include commitments to invest in the US economy. For instance, the EU is to purchase US$750 billion ($960 billion) worth of US energy products (mainly liquefied natural gas) over three years, about triple the current level, and invest US$600 billion in the country — in addition to eliminating import tariffs on all US industrial goods.
The EU will also raise defence spending to 5% of gross domestic product (GDP) and purchase US-made arms. South Korea pledged investments totalling US$350 billion and Japan, US$550 billion. Malaysia, a comparatively much poorer emerging nation, agreed to purchase US$150 billion of American goods over five years and invest another US$70 billion in the US economy over the next decade, with the bill totalling more than US$240 billion — all this, in addition to eliminating duties on US imports, to secure a 19% US tariff, the same as that levied on Indonesia, Thailand and the Philippines and slightly below the 20% for Vietnam. For perspective, the US had a goods trade deficit of US$25 billion with Malaysia last year.
Companies, foreign and US-based, are committing to investing hundreds of billions of dollars to onshore and expand their US supply chains and research and development (R&D) — to avoid paying the high tariffs. For instance, Trump unveiled plans for 100% tariffs on all imported chips but will exempt tech companies that promise to manufacture domestically. In response, Apple upped its planned US investments by another US$100 billion, bringing the total to US$600 billion over four years. Similarly, Nvidia Corp has pledged to invest US$500 billion in the US.
“TSMC [Taiwan Semiconductor Manufacturing Co] is exempted from the chip tariffs because it has set up plants in the US,” according to Taiwan’s Liu Chin-ching, minister in charge of the National Development Council. TSMC is in the midst of spending US$165 billion to set up fabs, advanced packaging facilities and an R&D centre in Arizona. It is interesting to see how countries and companies are now lining up to “support” Trump’s tariffs — to win his approval, get the better deal and, therefore, gain an edge over others, rather than collaborating against tariffs. And it is this fact that will raise US productivity. More investments, more jobs, higher productivity and wages, increased relative competitiveness.
Tariffs are also a source of revenue for the US government. The US collected nearly US$30 billion in tariff revenue in July alone, and US$152 billion so far this year. The latest round of trade deals took effect on Aug 7, which will further lift the effective tariff rate — to around 18%, well above the 2% level before Trump took office.
US Treasury Secretary Scott Bessent estimates tariff revenue will far exceed US$300 billion in 2025. For 2026, tariff revenue would be around US$600 billion, given US$3.3 trillion in imports of goods. The additional revenue will help pay for Trump’s tax cuts (effectively replacing some income taxes with consumption tax) and spending agenda without blowing out the fiscal deficit and US indebtedness. Lower corporate taxes make US investments even more attractive.
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Trump and many of his supporters also believe the US has been taken advantage of, especially by friends and allies, over the decades. They believe the US empowered the rapid growth in the world economy — by ensuring relative peace among major powers and maintained global order, thanks to US military predominance — fuelled by the stability of the US dollar for global trade, payments and as the reserve currency. The resulting rise in demand for the US dollar and US assets caused the overvaluation of the greenback, leading to less export competitiveness and the hollowing out of manufacturing, American job losses and the associated socioeconomic issues. Rising imports and declining exports resulted in consistent and large current account deficits. Left unchecked, twin current and fiscal deficits and growing debts will eventually (even if not in the foreseeable future) raise credit risks for the US dollar, threatening its hegemony. Tariffs are a way to tax the world — to extract a compensation for this cost burden of providing a security shield, for the use of the US dollar and for American consumption that drives economic growth and development in other nations.
In a nutshell, Trump’s tariffs are intended to achieve several key MAGA objectives, including improve the US’ trade balance with the rest of the world, boost domestic investments, reindustrialise and create more jobs and higher wages and support stronger economic growth that will, in time, reduce fiscal deficit and debt-to-GDP to ensure fiscal sustainability and, ultimately, preserve US dollar hegemony.
Short-term pain for long-term gains
As much as almost all global media and opinion leaders are highly critical of Trump, the fact is that he is one of very few politicians and national leaders willing to impose short-term pain on its people for long-term gains.
The short-term impact of tariffs is higher US domestic inflation and weaker consumption, economic growth and corporate earnings growth. The slowdown in private consumption (grey bar in Chart 2), which makes up 70% of the US economy, and employment are already visible in data for the first half of the year (see Chart 3). They have yet to translate, however, into slower growth in corporate earnings, which have stayed resilient — and better than low-bar market expectations.
With the second-quarter earnings results season almost over, earnings growth of Standard & Poor’s 500 companies stands at 11.8%, well above the estimated 4.9% at end-June. Actual revenue growth has also exceeded forecasts, running at 6.3% at this point, versus 4.2% two months ago. And margins remain near historical highs at 12.8%. The stronger-than-expected earnings are driven primarily by Big Tech and the financial sector. Better earnings, persistent robust momentum behind the artificial intelligence (AI) trade as well as growing expectations for imminent interest rate cuts by the US Federal Reserve are keeping US equities near record highs.
As long as inflation expectations remain anchored — they have, thus far, and should continue to in the absence of retaliation from others — the inflationary impact from tariffs will be short term (see Chart 4). This will pave the way for the Fed to lower short-term interest rates within the next few months. But we are not so sure that long-term yields will fall by much. The term premium is reverting closer to average historical levels — with the end of the secular inflation decline since the 1980s (driven primarily by China’s accession to the World Trade Organization and globalisation) and from the lows after the global financial crisis until the Covid-19 pandemic (thanks to massive central bank quantitative easing) (see Chart 5).
We think earnings growth will slow over the next few quarters as the full impact of the tariffs hits. Stock valuations have yet to reflect this. In fact, we suspect investor expectations are far higher than prevailing analyst earnings forecasts suggest, hence our current cautious stance on US equities.
We remain positive, however, on the US economy and US stocks in the longer term. As mentioned above, tariffs will boost domestic investments. Coupled with the other main thrusts of MAGA, a smaller and less interventionist government, deregulation and lower corporate tax rate — along wiith increasing adoption of artificial intelligence (AI) by enterprises — the cost of doing business in the US will fall. The country will become more competitive.
Trump’s America is moving right
While efforts by the Department of Government Efficiency (DOGE) could probably be better planned and executed, its overarching objectives are correct — a leaner and smaller government; better transparency and accountability; reduced bureaucracy; cuts on unnecessary spending, wastage, fraud and abuse; and streamline and modernise federal operations through digitalisation and AI tools to raise productivity and deliver more efficient services.
Many hard-working middle-class Americans have been growing increasingly dissatisfied with the direction in which the US was heading — culturally and, more importantly, economically — following years of progressive left governments, and especially the Biden administration. The increasing maze of regulations and oversights as well as government largesse — such as cash cheques and massive student loan forgiveness, significant expansion in welfare and benefits programmes as well as foreign aid — have led to larger and larger fiscal deficits, all of which must be paid for by American taxpayers.
Trump won the presidential election by promising to move the country right. To refocus on pro-growth policies and private sector-led investments and innovation, with less government intervention. Stronger domestic investments will lead to more jobs, higher productivity — in terms of wages and living standards — and relative US competitiveness in the world.
Free-market capitalism has always been the US’ strength and the key reason behind its success. And it will continue to be the driving factor. To quote Raghuram Rajan, a prominent economist, former governor of the Reserve Bank of India and chief economist of the International Monetary Fund: “The world needs reminding — governments are not good at picking winners.”
Government efforts to pick and/or create national champions are inefficient, distort market competition, stifle innovation and often ineffective, besides encouraging corruption.
‘Choose the harder right instead of the easier wrong’
A government’s role is to be the facilitator and enabler, to cultivate an environment in which firms can compete on a level playing field. The aspiration for upward mobility and the equality of opportunity will drive entrepreneurship, innovation and productivity. Those that cannot meet the mark will fail and resources will be reallocated to other, better uses. China is a prime example of how the government makes strategic macro policies but allows private firms and market forces — yes, in alignment with the interests of the Chinese Communist Party — to drive growth.
Many of the country’s largest and most successful companies today — Alibaba Group Holding, Tencent Holdings, Xiaomi Corp, JD.com, Baidu, Pinduoduo, Meituan and ByteDance, to name a few — are founded by private entrepreneurs, many with humble beginnings. They emerged and flourished in Deng Xiaoping’s socialist market economy landscape, post-1978. Today, the Six Little Dragons — the group of fast-rising tech start-ups that include DeepSeek and Unitree Robotics — are all privately founded.
As we explained in our recent two-part series on the AI tech war between the US and China, much of the Chinese funding fuelling its tech ecosystem comes from the government. This is because China’s private capital market remains relatively underdeveloped (unlike that in the US). Critically, though, like in the US, China’s innovation system is very much performance-based. Indeed, President Xi Jinping eschews handouts and welfarism — favoured by Western liberal governments — as encouraging laziness (“lying flat”) and dependency. He has made clear that the pathway to common prosperity is through hard work — by growing the economic pie, albeit not through unchecked capitalism — not in becoming a welfare state and that the country must avoid such a trap.
For example, the “Little Giant” programme is an initiative launched in 2018 to foster the next generation of high-growth-potential small and medium enterprises, especially in strategic and high-tech industries. State support (preferential financing, tax breaks, subsidies, access to research institutions and government data and so on) is channelled to enterprises that have demonstrated market competitiveness (for example, report minimum annual revenue and profit growth) and scaleability, hitting defined thresholds such as R&D staffing, capabilities and IP ownership (see Chart 6).
We have said this many times before: Enterprises that embrace AI and advanced technologies in their businesses will be the eventual global winners. Trump’s pro-growth, pro-business policies and China’s market-driven innovation system will make them the undisputed leaders. Both countries have a deep talent pool. US universities and research institutions regularly top world rankings and the country is a magnet for foreign talent. China, too, has a huge pool of young business leaders and entrepreneurs and is investing heavily in education, including integrating mandatory AI education in primary/secondary schools and vocational institutions. Other nations are left to fight over the crumbs. Smaller nations, especially, have little choice but to follow this lead — raise productivity with pro-growth, market-driven policies — or risk being increasingly outcompeted in the future AI-driven world economy.
The Malaysian Portfolio gained 1.1% for the week ended Aug 13. All stocks in the portfolio ended higher except for Insas Bhd – Warrants C (-20%). The biggest gainers were United Plantations (+5%), Kim Loong Resources (+2.6%) and Malayan Banking (+2.4%). The gains lifted total portfolio returns to 183.6% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 13.3% over the same period, by a long, long way.
Meanwhile, the Absolute Returns Portfolio rose 0.6% last week, boosting total portfolio returns since inception to 31.7%. The top three gainers were Alibaba (+6%), Tencent (+3.1%) and Goldman Sachs (+2.8%). At the other end, CrowdStrike (-4.3%), SPDR Gold MiniShares Trust (-0.4%) and ChinaAMC HangSeng Biotech ETF (-0.4%) were the biggest losers.
The AI Portfolio fell 5% over the same period, paring total portfolio returns since inception to -2.7%. The two gaining stocks were Alibaba (+6%) and RoboSense Technology (+1%) while Twilio (-21.9%), Intuit (-8.7%) and Datadog (-6%) ended in the red.
Although Twilio reported 2QFY2025 revenue and earning beats, the market was unimpressed by the company’s guidance for the current quarter. Management raised FY2025 organic revenue but left the target for operating income unchanged, stoking concerns about squeezed margins. In the most recent quarter, gross margins slipped 0.6%. We kept all three portfolios unchanged and continue to hold a high percentage of cash for both the Malaysian and Absolute Returns portfolios.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
