An important part of the reason that we think the US economic outlook is strong is because the global economic outlook is strong. It’s much easier for any economy to perform well when its trading partners are also performing well. And that’s one of the reasons we think the stakes around trade discussions are particularly high.
The Trump administration announced plans to put a 25% tariff on steel and aluminum imports. By itself that’s not a particularly big deal. The US isn’t particularly trade sensitive. Imports and exports aren’t a huge part of what we do, but for many other countries in the world, that isn’t true. They are much more sensitive to changes in global trade.
And so what may seem like the imposition of a small tariff from our perspective may be much more significant to some of our trading partners. And particularly if additional trade measures are taken or thought to be possible, then our trading partners may struggle economically in a way that they wouldn’t otherwise. And if they perform less well, it creates a headwind for the US economy, rather than the tailwind that we’ve enjoyed over the past few years as our trading partners and the rest of the global economy have accelerated.
Our trading partners may put reciprocal tariffs on our goods. And you could see a situation where that sort of policy starts to spiral. Free trade is a significant underpinning of the broader global economy, and it’s discouraging to see the largest, most important economy take a step back from free trade. It does appear that the Trump administration is much more focused on the trade deficit than on the fiscal deficit, and it is true that the trade deficit is expanding.
Our point of view is that the expansion of the trade deficit represents evidence of economic strength. When you import more than you export anyway, and demand goes up, you necessarily import more. And so an increasing trade deficit isn’t a sign of weakness, and to our mind at least, it isn’t something that requires an immediate correction.
Our view, of course, is that the fiscal deficit is cause for more concern. We do think it raises questions about debt sustainability; we do think it’s a variable that is likely to push interest rates higher over the medium term. And we think it’s something that ought to be addressed with more urgency than is the situation around trade policy.
But at the end of the day, both of these policies are driven by politics. With midterm elections approaching, it may be unpredictable which policy gets the focus and when. And that cycle, the political cycle, is a part of the reason that we expect volatility to continue to increase.
