As anticipated several times during the election campaign, on April 2nd, known as Liberation Day, US President Donald Trump announced a significant increase in import duties on several countries. The already nervous US markets didn’t react positively, and the Stock Exchange, along with US Treasury Bonds, was seriously affected. Many economists are convinced that the protectionist import duties policy didn’t trigger the expected consequences on the American Economy, one of the leading economies that has benefited the most from the globalisation process. Due to this policy, the market’s confidence, along with the GDP forecast, was significantly affected, resulting in a substantial impact on the USD.
Initially, the commercial policies’ intention was probably to reinforce the USD’s position. Still, after the USD’s drop, markets started to worry about a further USD deterioration due to a possible interest rate increase by the Fed. The actual USD drop concerning the Euro is a fact, regardless of whether the USD was always considered by investors as a safe-haven asset, especially during periods of economic uncertainty or market downturns. The constant deficit in the US Trade Balance (Export minus Import) allowed international investors, such as Japan and China, to strongly reinvest a vast amount of available money in US Treasury Bonds. Nowadays, this trend has changed dramatically, and the increasing sales of Treasury Bonds can be interpreted as a natural countermove to the US Import Duties policy.
The massive divestment of US bonds and the consequent release of a large amount of USD, along with the market’s loss of confidence, contributed to the USD drop. In theory, the actual USD weaknesses and the increase of import duties should boost the US exports and improve the US Trade Balance. Nevertheless, this is not 100% correct, considering the market uncertainty and the countries’ reactions to the US Import Duties policy. It’s also true that Trump’s policy is totally in line with last year’s protectionism trends. The problem is the uncertain climate linked to the unpredictable next steps of this chaotic scenario. In particular, to what extent does this Import Duties policy represent a leverage of negotiation between the US and the other countries? It is clear that the negotiation process is strictly linked to the investment or disinvestment of US Treasury Bonds, and this is confirmed by the reactions to Trump’s announcement of a 90-day freezing period.
At this stage, we could see some room for manoeuvre for the US, especially in the presence of a radical change in the US Commercial Strategy initially adopted. It will also be essential to analyse the other countries’ reactions and the risk of emigration to the US economy, whose supply chain is strongly dependent on imports, as demonstrated by the pandemic. The climate of uncertainty won’t definitely help the market’s recovery, even if there is some room for negotiation linked to the US commercial strategy reformulation, particularly regarding import duties. Ultimately, the USD always plays a predominant role in global markets, which, together with investment in US Treasury Bonds, will represent an important element in negotiations.
Edited by Prof. Paolo Bongarzoni
Dean, Swiss School of Management and Corporate Director
