One Word: Tariffs

Please find attached a note on Trump tariffs.

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But before I discuss tariffs, I compare the 'oh-noes-Trump-end-of-the-world sentiment' with a past episode of Europeans agonizing over US politics: the two Bush Jnr. Administrations. In both cases we agonized over US exceptionalism. This time isolationism, back then interventionism.

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Regarding tariffs, the Eurozone, and especially Germany, are in the privileged position of being very vulnerable to US tariffs. Our trade shares in GDP are simply excessively high (50% in case of the former, 75% in case of the latter, which compares with around 10% in the case of the US).The US is the EU's biggest export market (data for the Eurozone only is harder to find). China is number two. I do not need to remind you that China is equally reliant on (indirect) trade with the US. I also need not mention our weak geopolitical position.

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Trump, like any other politician, wants to achieve many things. With tariffs he hopes to accomplish more than just reducing the trade deficit. But as the Tinbergen Rule states: one tool for each policy objective. That's why I do not worry that much about tariffs that will hit the Eurozone particularly hard (tariffs are overrated because most economists hate them. At the same time, economists are very much overrated). In any case, I am expecting a rerun of Trump 1.0. Some tariffs and/or threats of tariffs, drawn out talks, uncertainty, but no big bang, shoot-first-ask-questions-later tariff move. Europe will fold, mostly anyway, and that will limit the economic damage.

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Optically, key currency crosses have not priced in much in the way of tariffs. That means that if we are all wrong - including yours truly - Trump still has the power to surprise with something big.