Trumpianomics: Why tariffs, and their effects on the US economy, inflation, interest rates, competitiveness and the USD

On the domestic front, the Department of Government Efficiency (DOGE) aims to enhance transparency and reduce unnecessary government expenditures, bureaucracy, excessive governance, staffing, foreign aid contracts and even defence spending. On foreign policy, he shocked the world with his Gaza vision and attacked Ukraine and its president, and side-lined the EU.

On the economic front, he imposed the harshest tariffs on immediate neighbours and closest friends, Canada and Mexico, besides China. He has now publicly articulated his displeasures and threatened tariffs on other close allies, the EU, Japan and South Korea. On the other hand, it seems inevitable that some of the sanctions on Russia will be lifted as part of the negotiation for ceasefire in Ukraine.

The world is naturally in shock, leaders are in consternation, economists are confounded, and political analysts are flabbergasted — most people are simply horrified and concerned about what is to come. The financial markets are volatile, even the safe US Treasuries.

The Prime Minister of Canada has described Trump’s tariffs as “very dumb”, while President Vladimir Putin has agreed to help Trump broker nuclear talks with Iran.

See also: Time to cut government spending to reduce tax and boost investments, productivity and wages

So, is it just an unorganised, dumb, eccentric, tantrum-throwing madman running around breaking things? Or is there a “method in the madness”? Could it be a well-conceived strategy to achieve Trump’s stated objective to reconfigure the international trading and financial system to Make America Great Again (MAGA) through (1) reindustrialisation, (2) revitalising the manufacturing sector, (3) increase relative competitiveness, (4) preserving the hegemony of the US dollar, and (5) furthering the US national security interests?

To quote Trump in his March 5 address to the joint session of the US Congress for the first time since he returned to power, “Tariffs are about making America rich again and making America great again. And it’s happening. And it will happen rather quickly. There’ll be a little disturbance, but we’re okay with that. It won’t be much.” And contrary to the past when many thought the threat of tariff was only to be used to negotiate with other nations, everyone now accepts it is a reality.

Thus, the reason for this article. Is Trump right in making the claims that imposing tariffs on others, including allies, will make America great and rich? What are the possible reasons that imposing tariffs on others is good for the US? What are the expected outcomes on global and US economic growths, inflation, interest rates and the various exchange rates? How will it affect the equity and bond markets? Is there a well-articulated plan that Trump already has and is now executing, given the pace at which he has moved?

See also: High cost of private healthcare: Who is (ir)responsible and how to mitigate?

Contrary to others, we believe the various apparently disparate actions on the domestic, foreign, and economic fronts are in fact a well-conceived, connected and comprehensive strategy to fulfil his MAGA objectives. Critically, we will explain why Trump and his advisers do not see the present world economic order and financial system, created after World War 2, principally by the US itself, are serving the interests of the US — with imminent threats to the hegemony of the US dollar and a unipolar world dominated by the US. And therefore, the actions we see today are just the beginning of Trump’s attempt to reverse and recreate a new global economic and financial order for the benefit of the US. Our intention is to try to present an intelligent, dispassionate, rational and unemotional perspective. And we think this is much more useful than being blindsided, leading to bad decisions. Political leaders, economists and investors need to think outside the box to better understand the US today. Love him or loath him, at least he says what he means, and does what he says (unlike most politicians).

This week, Part 1 of 2, we will focus on why Trump is using tariffs (or threats thereof) aggressively so early in his administration, especially with friends, neighbours and allies, more than with enemies. (Why hurt your friends more than your enemies?) Why the mercantile unfriendly treatment of Ukraine, and the “friendliness” to Russia? Why he, and many Americans, think the US has been taken advantage of by both friends and foes. Why DOGE, why Trump needs to quickly deregulate the US economy (by removing government employees and regulations) to increase efficiency and productivity, and the push for tax reforms and cut taxes to stimulate investments and consumption, to create jobs and boost relative competitiveness?

In Part 2 next week, we will present our views on what is the end game for Trump, using tariffs as an initial tool — whether Trumpianomics will work, who wins and who loses, and our investment thesis. Our articulation will include why the MAGA objectives themselves require conflicting demands — and what policy tools might be available to resolve these contradictions. For example, the ambition to export more than import and the reindustrialisation of US require actions that will work against the aim of preserving the US dollar hegemony as the world’s only reserve currency (we will explain). Or the desire to further strengthen national security and be the sole superpower for the world may conflict with the goal of reducing government spending and balancing the budget. Does Trump have a solution? We think he does — and we will explain what they are. But it will not be easy to execute and the window of success small, even for the world’s most powerful nation.

What is Trumpianomics?

Trump and many of the American middle class believe that the US has been taken advantage of by both foes and friends, particularly in the unfairness to trade and the sharing of the cost burden by the US in providing a security shield to allies and friends. Americans are fed up with international trade, where the US has run quarterly current account deficits since 1982, except for two quarters in 1991 (see Chart 1). They see imports replacing domestic production, Americans losing jobs to foreigners. And this threatens US national security, as manufacturing capacities are hollowed out (to quote Trump, “If you don’t have steel, you don’t have a country”). That the US is carrying the costs of global financial system stability through the provision of the US dollar as the reserve currency and allies are not sharing the burden of the US providing the security cover in defence spending. All of the above makes Americans poorer, unable to rebuild the nation’s infrastructure and makes the US less globally competitive. And unemployed youth turn to drug addiction. Factory closures empty out towns.

For more stories about where money flows, click here for Capital Section

Why fentanyl? The focus on fentanyl is more a political sound bite to rally Trump’s base. Yes, there is an opioid crisis and there are thousands of overdose deaths. Politically, this facilitates the linking of law and order, the border security and anti-smuggling agendas to the removal of immigrant workers from the US, to protect jobs for Americans. And it is useful to blame China as the main supplier.

So, why do Trump and the American people feel that they are not getting a fair deal in international trade? After all, it was the US that played the central role in shaping the current international institutions and alliances designed to maintain peace, foster economic growth and establish rules for international relations, such as the United Nations (UN) and the Security Council, the Bretton Woods System that created the International Monetary Fund (IMF) and the World Bank, the General Agreement on Tariffs and Trade (GATT) and the World Trade Organisation (WTO), and even the North Atlantic Treaty Organisation (NATO) after World War 2.

The US was the key founder of GATT and supported its evolution into the WTO. It was the US that pushed for global free trade, or at least when it suited the US, when it had competitive advantage of exports. This global trade and military alliances like NATO succeeded in the Cold War fight, and together with the dominance of the US dollar, reinforced the US economic and military hegemony, along with their many advantages.

Why are these very same institutions and arrangements, rules and alliances now seen as unfair to the US? What has changed? Is it simply a case that other nations have caught up, learnt the rules of the game and are now outplaying the US and Europe, so much so that it is now time to change the rules again? Or does having multiple objectives inevitably lead to conflicting demands, trade-offs and paradoxes that now weakens the US?

It is this question that leads us to our next section. Despite setting up all the rules and institutions to favour the US, why are Americans now feeling that the world is unfair to them?

The rise of other nation states and the hegemony of the USD

Chart 2 best explains this feeling of unfairness to Americans. The world trading order and financial systems that the US was principally credited for putting in place after World War 2 has enabled the global economy to grow rapidly since 1960, including the US. However, the rest of the world has managed to grow at a faster rate than the US. From 1960 to 2023, the CAGR in terms of nominal GDP for the world (excluding the US) was 7.5%, while the GDP CAGR for US was 6.4%. Consequently, the US share of world GDP have declined from almost 40% in 1960 to just 26% now.

This rapid economic growth is attributed to several key factors, including technological advancements, globalisation, policy reforms and demographic changes. Specifically, it involved automation and computing, the internet revolution, advances in energy production (nuclear power and fracking), expansion of global trade, outsourcing and supply chains, transportation and communication (container shipping, cheaper air travel and telecommunications), market liberalisation (including China’s economic reforms of 1978, post-Soviet reforms of 1991, India’s economic liberalisation of 1991) and global population growth.

Chart 2 does not fully capture the extent of the shift in global production capacities. GDP = C+I+G+(X - M). In Chart 1, we already showed that the US has been running consistent and large current account deficits since the 1980s. In other words, the (X - M) is negative. What causes growth in US GDP is largely driven by domestic American consumption (see Chart 3), and a larger and larger proportion of this is supplied by foreigners in foreign nations, where the goods are produced at far lower prices than those from the US. Americans see this as creating jobs in foreign nations at the expense of jobs in US factories.

Chart 4 highlights this, where the absolute number of manufacturing jobs in the US has declined since 1980 (and even more as a percentage of total employment). Of course, a larger and larger share of employment has gone to the services sector, as one would expect when economies graduate into developed, advanced and rich nations.

To the rest of the world, this is an incredible privilege for Americans. While its shares of global production and of the world’s GDP have fallen over the past 60 years, its share of consumption has risen sharply. Americans have been enjoying more than the fruits of their labour. The US can consistently import more than what it can export. Americans have lived beyond their means. And it can do so because it commands the world’s only reserve currency, the mighty US dollar (enabled by the fact that the US is the world’s sole superpower), which it can print at will and until now, the rest of the world seeks to claim and own.

So, why does Trump and members of his administration not appreciate this privilege and want to change the current world order? This brings us to the next section.

The Triffin World and protecting US supremacy

The argument is that the US has suffered trade deficits, with imports replacing locally produced goods, thereby causing Americans to lose jobs because the US has been taken advantage of by its friends and foes. It arises due to the persistent overvaluation of the US dollar (or undervaluation of the currencies of their trading partners). The overvalued dollars make exports less competitive and imports cheaper. And this overvaluation is driven by the inelastic demand for the US dollar, because it is the reserve currency. Even though it is also the special privilege that Americans have enjoyed, living beyond their means.

In theory, in international trade, the above would not happen. Currencies adjust over the long term to balance international trade. A country that runs a trade surplus receives foreign currencies as settlement for its net exports. It then sells this foreign currency in exchange for local currency — thereby pushing down the value of the foreign currency against the local currency. And since the foreign currency is now “cheaper”, imports become more competitive and imports increase, thereby balancing trade.

But when a nation’s currency becomes the world’s reserve asset, currency equilibrium is no longer just dictated by domestic trade balances. The demand for US dollars is also to facilitate global trade, and to be held for investments and as reserves for large funds and central banks. In other words, the dollar as a reserve asset forms part of global money supply, a function of the size of global trade and savings — that is, demand is inelastic, it gets overvalued. This is the Triffin World, named after Belgian-American economist Robert Triffin.

As the global economy grows, the global pools of assets and savings expand exponentially and the world’s demand for dollars and US Treasuries (UST) rises. When US exports UST to meet this demand, the US receives foreign currencies in exchange, which it then spends on imports, further widening its current account deficit. The way Trump and his supporters would want to tell the story is, therefore, the US runs large current account deficits not because Americans want imported goods (and for Americans to enjoy a lifestyle beyond their means) but to help the world to grow more prosperous. Americans are doing the world a huge favour (by living a good life) and wants to be repaid.

But why now, to rebalance and recreate a new global trading and financial order (why fix something when it is not broken)? Because this special privilege of a reserve currency has a tipping point. As we showed in Chart 2, the US’ share of the global economy has fallen from 40% to 26%. As the US economy shrinks relative to global GDP (both are growing, but the US has been growing at a relatively slower pace since 1960), the current account deficit the US must run to fund the growing international trade, and savings must grow larger and larger as a share of the US domestic economy. This Triffin Dilemma is where the reserve currency leads to the twin current account and fiscal deficits for the reserve currency country, in this case, the US. And eventually, it leads to a tipping point where the dollar runs into credit risk, an unsustainable accumulation of public debt and foreign debt, that threatens the status of the reserve currency (it gets increasingly difficult to service the interest costs on the debts).

Losing the hegemony of the US dollar, coupled with a relatively shrinking share of global economy will spell the end of US dominance of the world order. America’s control of the international trade and financial systems is only because the US dollar is the reserve currency. This is ultimately what it is all about. American fears made worse by the deluge of books and opinions on the rise of the East and China, and alternative reserve currencies like BRICs (especially after the US weaponised the dollar).

While that tipping point may not be anytime soon, largely because at the moment there is simply no alternative to the dollar as a reserve currency, it is clear that pre-emptively striking at trade — improving the trade balance in favour of the US, reallocating aggregate demand from other countries to the US, increasing the share of the US in the global trade and the world’s economy — is the only route to preserving the hegemony of the US dollar as the world’s reserve currency (or to American storytellers, helping the US to help the world grow and become more prosperous by providing the reserve currency the world needs) and to retain the current unipolar world order. And that blunt tool is tariff.

Tariffs, inflation and currency offset

The overvalued dollar (or undervalued foreign currencies) is unfair to Americans — making exports less competitive and imports cheap, causing neighbourhood factories to close, Americans losing their jobs to foreigners. Unemployment leads to opioid addiction; opioids are smuggled into the country, destroying families and lives, emptying out towns and leaving infrastructure in decay, ending the American dream. The solution is to impose tariffs on imports, higher tariffs on those more unfair to the US — to balance out the impact of the overvalued dollar, while at the same time generating revenue for the US government (reducing fiscal deficit) and yet causing minimal inflation to the people. This is Trump’s story to the American people. Will it play out?

Trump is familiar with tariffs, having used it against China in 2018-19. Tariffs are imposed on imports, effectively a value-added tax on US consumers. They therefore raise tax revenue to the government. In Trump’s case, that additional revenue will be used to fund a tax cut, raising corporate profits and disposable incomes, stimulating investments and productivity, making the US more competitive, thereby boosting exports in the longer term. We wrote about this in our previous article (“Innovation, earnings growth and ruthless capitalism will continue to drive US equities’ relative outperformance”, Jan 27, 2025 issue).

The prevailing debate is the impact on inflation. Whether a higher tariff will translate to higher prices for the American public depends on a few factors. Most economists think it will. It is highly unlikely that in a globally competitive marketplace, the exporter can absorb the entire tariff, especially if it is large. And to the extent that the tariff cannot be totally absorbed by US wholesalers and retailers, some price increases will happen.

What Trump and his administration are counting on is for the US dollar to appreciate to offset the tariff imposed. The after-tariffed price of the import, in the domestic US market in US dollar price, would be the same — with no or minimal domestic inflation. How likely is this scenario? Advocates for Trump reference the 2018-19 tariffs imposed on China. The effective tariff on Chinese imports then was 17.9%, the Chinese renminbi depreciated against the US dollar by 13.7%, and therefore, US dollar price rose by only 4.1%. Actual measured CPI then was only 2%. Because there are many crosscurrents in economics, not everyone agrees. But to the extent that the dollar will strengthen with tariff, some pass-through to offset the tariff’s effects on inflation is inevitable.

Inflation can also be mitigated by reducing governance and compliance costs, by deregulation of the economy to boost growth and increase productivity — as in DOGE. Our view is therefore contrary to the consensus, in that while inflation will stay higher for longer (as we have articulated for a long time now in all our previous articles), we see only a marginal inflationary impact from the new tariffs Trump now impose on US imports, even if they are aggressive.

The next question is who bears the burden of the tariffs? It depends on the price that is passed through to consumers in the US. If there is perfect currency offset, that is, the currency of the exporting country is depreciated by the same percentage as the tariff, and the price to American consumers does not change in US dollar terms, then US consumers pay nothing for the tariffs. The people in the exporting countries become poorer due to their currency depreciation, they suffer real decline in wealth and purchasing power. In this perfect offset of tariffs and currencies, the other nations bear the entire tariff burden, while the US government collects all the revenue. Given the experience of 2018-19, this is what Trump hopes to achieve.

But what happens when there is no currency offset? American consumers will pay higher prices, and the tariffs will be borne by them. But imports are now more expensive than domestic production, and supply chain effects from higher prices of the imports will improve US competitiveness, while at the same time, the exporter will be motivated to export elsewhere, other than to the US. Trade adjustments favouring the US will still take place, but over a longer time.

And even without currency offset, US government revenue will rise with the tariffs. Yes, the consumer pays a “consumption tax” in this case, but the tax can be used to offset corporate tax cut, to stimulate investments and growth, productivity and jobs, while lower personal tax will help negate the rise in consumer prices. It is capitalism 101.

The limitations of tariffs

Yes, clearly there are limitations to using tariffs.Most economists would agree that for a large economy, imposing tariffs can be welfare-enhancing up to a point. The reduced demand depresses domestic prices of imported goods. But once the quantity imports have declined sufficiently large, the benefit from lower prices falls, and there is a point where the net benefit turns negative. What is this “optimal tariff” point? There is credible research done, and we think it is reasonable to believe this optimal tariff rate for the US is around 20% — although it will be impossible to have any form of consensus opinion. Reading Part 2, you will understand why it is not important to be precise on this “optimal rate” as it is only for an interim purpose, so long as you understand that tariffs can be wealth-enhancing, up to a point. And since the US’ effective overall tariff is at 2% currently, Trump can impose tariffs aggressively to below an aggregate of 20% and yet, Americans will be better off overall. This is exactly why Trump is rolling out tariffs aggressively now.

It is also a fact that any gains from imposing tariffs disappear when the tariffed nations retaliate by imposing their own tariffs on US exports. The breakdown of global trade will lead to a lose-lose outcome for both nations. And since the US is the richer country, the marginal pain for Americans can be worse than for others.

Therefore, tariffs are only a means to an end. And the people in the Trump administration are fully aware and have articulated so. Yet, we have seen many superficial and shallow articles written, repeating the common mainstream media narrative of how silly tariffs are, as if Trump is stupid. They need to look in the mirror.

Why Trump thinks tariffs now can  be effective to extract concessions

1. A quick and large tariff on its biggest trading partners, China, Canada and Mexico will have the biggest gains on government revenue — which can be used to reduce personal tax that will alleviate any rise in prices due to the tariff. It will also support corporate tax cuts that can increase investments and improve productivity, making US exports more competitive, to better help the US sustain a trade war.
2. The environment is also right for the US dollar to go up, offsetting any potential increase in the price of imports due to the imposition of tariffs, ensuring currency offsets will be effective. US Treasuries spread against the euro and others are significantly positive. US inflation is on a downtrend, and economic growth projections are on an uptrend. Its capital markets are supercharged to attract more capital inflows. And as we have discussed, an effective currency offset against tariffs puts the cost of the tariffs on the tariffed nations, not on the American people. US inflation will only rise marginally, allowing interest rates to fall, further stimulating investments and asset values, and not damage the housing sector.
3. Coordinated with the aggressive execution by DOGE to reduce government spending and deregulate the economy, the tariffs will improve productivity and America’s relative competitiveness, and expand exports. This gives the US an edge on its trading partners to throw a bigger punch, or makes it able to take a bigger hit when foreign nations retaliate with imposing their tariffs on US exports.
4. The total debt to GDP in China now exceeds 350%. Should imposing a large tariff on Chinese goods cause a currency offset, where the renminbi falls by a large magnitude, capital outflows from China can potentially cause an asset price and financial crash. This is especially the scenario now when the property market in China is in a precarious situation. These costs would exceed the cost to China of a US tariff itself. Meaning, the cost for China to retaliate on tariffs imposed by the US would be extremely high in the current economic and financial environment.

To make tariffs more palatable and cause less volatility to the financial markets, the strategy would be first to make public announcements of intentions to impose the tariffs and to impose gradually, slowly ramping up the tariff percentage. This is what Trump has done so far — many tariffs’ proclamations, and at high rates, only to see lower rates imposed and critical sectors with supply chain impacts on the US itself deferred. The financial markets have at times adjusted well to the expectations, but there are also recent occasions where they did not — causing equity and bond markets to fall sharply. Clearly, this president is concerned with the capital markets and he has reacted in response, tamping down the tariffs and even walking back (such as the tariffs imposed on Canada and Mexico recently).

This graduated approach also has the advantage in that the tariff itself is not the end game, but to get a predetermined set of concessions. With a clearly-set-out path of escalating tariffs, the ball is in the court of the tariffed nations to yield to concessions demanded.

Although not in trade, we saw this played out recently in the way the US dealt with Ukraine. Extracting economic concessions on minerals in return for support and concessions to make peace with Russia, as the US turned up the heat on Ukraine. It’s transactional, making deals for immediate outcomes. Raising revenue for the US government from foreign nations, including the cost of providing US security shield for allies, will be increasingly important to Trump, as this revenue feeds into the MAGA pathway strategy.

The paradox of Trump’s MAGA pathway

The contradiction to Trump’s MAGA pathway or plan is that currency offset is itself inherently not sustainable. Therefore, tariffs clearly cannot be a policy instrument to rebalance trade over time. Why? Because it requires the US dollar to keep appreciating each time it imposes more tariffs. But the overvalued US dollar (or undervalued foreign currencies) is the very reason the US feels taken advantage of. The undervalued foreign currencies caused imports to be cheaper in US dollars in the US and therefore replaces local production and US jobs.

In a tariff or trade war, with escalating tariffs by all parties, the US would have inflicted major harm to the world and to itself. Can Trump stop or dissuade other nations from retaliatory tariffs against the US by threats? Or can the US force the rest of the world to only use the US dollar as the sole currency, with the US Federal Reserve the only central bank capable of printing money? Argentina voluntarily opted for this route recently, but it will never be acceptable to most sovereign nations.

Critically, is it possible to resolve the Triffin Dilemma? To retain the hegemony of the dollar as the world’s only reserve currency, and yet improve its trade and fiscal balances, making US exports more competitive, without an overvalued dollar, with US inflation and interest rates staying low? To reindustrialise and rebuild US manufacturing capacities? To boost government revenue at the expense of other nations? In other words, to achieve all the aims of MAGA at the same time? Inevitably, it will involve a high degree of coercion, threats, deal-making — and a high degree of risk to the world.

How? Read Part 2 next week.

We acknowledge that many of the ideas here are not original, but have been extracted from articles and books written by others. But we take full responsibility for the conclusions and inferences we arrive at, including linking up the different ideas, views, theories and data into what we think are the intentions. The MAGA pathway is only our own view and visuals, not any official articulation. We have tried to simplify the totality of the views and brought them all together into a simple-to-understand and comprehensive narrative for a wider newspaper audience. Some technicalities and research references are intentionally left out for this reason.

The Malaysian Portfolio fell 3.5% for the week ended March 12, performing slightly better than the market benchmark FBM KLCI, which fell 5.1%. All the stocks in our portfolio ended lower. The biggest losers were Insas Bhd – Warrants C (-21.4%), Gamuda (-11.1%) and KSL Holdings (-7.3%). Total portfolio returns now stand at 178.6% since inception. This portfolio is outperforming the benchmark index, which is down 18.8% over the same period, by a long, long way.

We would expect more volatility ahead for the local bourse. Selling accelerated in the past week as fears of tariff-driven global trade and supply chain disruptions grew, culminating in the 35-point drop for the FBM KLCI last Wednesday. The index is now down 9.6% year to date while mid- and smaller-cap stocks fared even worse. The FBM70 Index and FBMACE Index have fallen 16.9% and 18.2% respectively over the same period. Foreign investors were the consistent sellers on Bursa, with net selling totalling more than RM7.1 billion so far this year, compared with RM4.2 billion in the whole of 2024.

The Absolute Returns Portfolio also closed lower last week, down by 3.7% as the selloff in US stocks continued amid more tariff uncertainties and recession talks. Last week’s losses reduced total returns since inception to 20.4%. Reflecting the growing market volatility and risks, the CBOE VIX Index spiked sharply higher (above its long-term average) as investors rushed to hedge their portfolios. We have added to the portfolio the SPDR Gold MiniShares Trust (GLDM), an exchange-traded fund (ETF) that invests in and whose price tracks the price of gold. This is a cost-effective way to gain exposure to gold prices without having to own the metal directly. GLDM ended 0.5% higher from our investment costs. The other two gaining stocks were Tencent Holdings (+1.3%) and Talen Energy (+0.6%) while the three biggest losers were Grab Holdings (-12.6%), Goldman Sachs (-9.7%) and JPMorgan Chase (-9.4%).

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.