Blog: You, us, everyone

It's been a very violent start to Q2 for the financial markets. The major indices fell heavily, following Donald Trump's announcement of reciprocal tariffs well above expectations. The bar minimum is now at 10%, but some countries experience punitive sanctions well beyond any good. In the case of China, the total levy is now at 145 %, Vietnam was initially hit with a tax of 46%, but based on Vietnam intentions to purchase U.S. defense, security products, animal feed products, which should help address the trade deficit, the U.S. Administration paused the implementation of the 46% tariff for 90 days. Just 90 days, not 91 or 89, aka there is no time to establish a proper trade agreement. This way of going forward is, by no means, logical, but it is rather an opportunistic approach to turn upside down everything which was built over the last century.

To understand Donald Trump's logic, forget your traditional economic reference points! This advice comes from economist Stephane Garelli, who has been tracking and dissecting the workings of competitiveness for over thirty years. According to our research, here is part of his view on how things could unfold and what the potential ramifications could be.

With hindsight, one can say that we don’t need to look for an economic theory upon which the most recent changes were engineered. There is a very simple logic: that of a merchant selling access rights; access rights to four things that the US owns and that have considerable value.

1. US Consumers:

   First, there are the 135 million American consumers, or rather geese that are administered force-feeding, though the U.S. Bureau of Statistics speaks of “consumption units”; The Bureau of Statistics is consolidating households or roommates into one unit; altogether, this makes up some 347 million U.S. citizens. Donald Trump, as a businessman and tribal leader, sees the US territory as a corporate unit, an entity that can be shaped to its own will. To access this entity, you either have to pay tariffs or make direct investments, which, ultimately, he believes, will provide him and his descendants with lasting royalties.

2. US Technology:

   Then there's access to American technology, which he says must also be paid for through investment.

3. Plaza Agreement - The Dollar:

   Remember, through the 1985 agreement under which certain countries undertook to intervene on the foreign exchange market to depreciate the USD, globalization started to take shape, lifting millions of people out of poverty in EMA, while at the same time interest rates and inflation started to trend downwards in DM. Now, under some sort of Plaza 2 Agreement, probably to be called the “Mar-a-Lago Agreement”; he tries to reverse this trend by asking corporations and sovereign entities to invest in the US, which should help drive MAGA. Yet, this thought requires irrevocably that central banks will have to sell dollars to reduce their value.

4. Military Power:
Access to military protection and military equipment is the final element. The approach used in the case of Ukraine was blunt and simple: you give me access to your resources, and I will give you some limited protection. This is pure neo-colonialism. The official version is though: to access and stay under the U.S. umbrella and obtain us military equipment, you're going to have to take out unlimited Treasury bonds at zero interest. This will enable the US to finance its infrastructure at zero cost.

Behind this approach lies a merchant mentality, and every elementary financial analyst understands that the accounts will never add up. Example: The amount of tariff due is not based on a mathematical formula elaborated by rocket economists, but rather it is a question of price at the expense of value! For the last 40 or so years, world leaders have focused on some economic logic, but under the new administration, everybody needs to scale back to the vision of a merchant who tries to sell us something.

The US administration at the helm probably didn't realize the extent or truly underestimated America's dependence on the rest of the world and the respective trade flows. The new tariffs not only apply to finished products, but also to semi-finished products that are imported and some of which are likely to be re-exported, hence everyone has to swallow the bad medication.

That's why the stock markets all across the globe have fallen so sharply. At a granular level, we also observed a dramatic widening in US corporate credit/high yield spreads, which means Mr. Market is now certain that default risk will strangle various corporations in auto finance, subprime mortgages, student loans, and credit card receivables. Hence, we expect the fallout ratio to be high and probably for a prolonged period. In Asia, the widening of sovereign credit default swaps also attests that the business model of export-driven emerging markets is defunct. A conclusion reinforced by the 18% plunge in the shares of Standard Chartered Bank PLC in Hong Kong.

What are the ramifications of this approach?

• Chinese leadership?

  According to economist and professor Li Daokui, the present move by the US Administration signals the end of US leadership in globalization. According to him, China, with its population of 1.4 billion, has the economic foundations to lead globalization, and he suggests that the CPPCC to negotiate more free trade agreements with other countries, which in turn will offer alternative opportunities for Beijing. Yet, Li Daokui doesn’t address the fact that close to 38% of the country's foreign reserves are held in USD. If they drop the US as their main trading partner, then they drop themselves too.

• The end of Reaganism and Thatcherism

  Reaganism and Thatcherism stand for free markets, small governments, strong conservative values, low taxes, and a strong military. The US and the UK have exercised at various levels with the core values of economic liberalism and globalization. While there is an undeniable success story for the US, it is less the case for the UK. For the French economist and author of the best-selling book 'Capital in the 21st Century', the presently implemented actions are first and foremost a reaction to the failure to achieve the core values of economic liberalism and globalization. The present US President promoted MAGA, a message he addressed to the US middle class, who has not benefited from globalization.

  By scapegoating the rest of the world and imposing trade sanctions, the present US Administration believes that the rest of the world would neglect their benefits and discount products so that US consumers can benefit from the same price levels as before, while the US Administration charges important duties. Yet, since production lines are lean and efficient, foreign companies can’t endlessly reduce output prices. Given this, the Trump cocktail is simply going to generate more inflation and more inequality, first and foremost in the US, and most of the damage will occur to its Republican electoral base.

• Lacking demand The battle of the titans has taken the rest of the world hostage, and so the global consumption. One of the most sensible products for global consumption are the petrochemical products. Remember, over 95% of manufactured goods today rely on petrochemicals at some stage: from our iPhone, to our clothes, to the tires on cars, to our medicine.

  Major oil-producing countries faced with plummeting oil demand will be exposed to a lack of budget inflows, in turn, it will increase their own financial instability, social insecurity in countries like Egypt, Saudi Arabia, among others, and risks of recession will increase while at the same time, R&D for new resources will be stopped which will in turn make base resources more expensive in a second phase. The present turmoil is like digging a grave, into which you will fall yourself. The issue here is: the deeper you dig, the less likely it is that you recover from the fall.

Going forward

The traditional anchors of economic theory and globalization are being rapidly dismantled. What we are witnessing is not a calculated realignment, but a disruptive, merchant-driven strategy that prioritizes short-term gains over long-term stability. By turning international trade into a marketplace of forced concessions and protectionist deals, the U.S. administration risks not only isolating itself but also destabilizing the very global economy that has underpinned its own prosperity for decades.

The consequences are already visible: market turmoil, rising credit risks, inflationary pressures, and the erosion of trust in established alliances. Meanwhile, emerging powers like China, Brazil, India, the UAE, to name only a few, are positioning themselves to fill the leadership void, albeit with their own constraints. The deeper the current policy digs into protectionism and division, the more painful and prolonged the inevitable recovery will be.

Forget the old reference points. A new, uncertain economic order is being shaped - not by careful design, but by a volatile blend of opportunism, revanche, nostalgia, and populism. We'd better brace ourselves for a bumpy ride ahead.