Let’s talk about tariffs... oh, and how about that crypto reserve?

THE catalyst for quite a lot of the present angst in markets is without a doubt President Trump’s insistence he is going to impose lots of tariffs on lots of countries for lots of things.

His view (or his apparent view) is this will stop America importing those products and eventually produce more of them in the good old US-of-A.

An economist will tell you this is probably only very short term and longer term might have some beneficial effects and not just in America. And it could just be negotiating tactics to get his way.

To take just one instance – Germany. They are still running a large current account surplus which in many ways is a bad thing. If German cars cost more in America because of the tariffs, Americans will (possibly) buy more Japanese or Korean cars. That said, German Mercedes and Audis are probably fairly inelastic in terms of demand (remember that from Economics 101?) as they are aspirational and not necessary as such. You can replace them with a Trabant if you really want to.

What the tariff might do though is switch some German exports back into domestic consumption. That would have the beneficial effect of reducing the primary surplus and presumably make German consumers happy because some prices within Germany will fall.

That applies across all products. French wine? Americans might buy more Chilean or New Zealand. And so it goes, tariffs are not quite the draconian nuclear option that people are thinking they are. What it means is that the balance of trade in those countries which make up whatever the shortfall is will change – and that might be a good thing.

It would be a very good thing if China consumed more of what it produced. Its trade surplus would fall and several other good things would happen. Lots of Chinese who have never had the chance to acquire certain things would be able to obtain them.

There would be a drop in carbon emissions because so much wouldn’t be being shipped all over the place. The US Dollar would likely rise which in itself would reduce prices in America, thus offsetting tariff led price increases.

If American consumption falls, by default the producer countries either have to cut production or sell it to their own people – and potentially at a discounted price.

I’d be very surprised if, in a couple of years’ time, that “invisible hand” of Mr Market hasn’t evened things out. That’s one of the joys of economics - it allocates resources in the best possible way if left alone to do so. It finds ways round intractable problems without creating another problem.

President Trump may not be entirely right to say that Europe has ripped America off, but as sure as eggs is eggs Europe hasn’t done much to remove the impression that that is the case. Never mind the abrogation of defence to America, we have long spent on social care what we could not afford – effectively bankrolled by America.

All President Trump is doing is trying to redress the balance back to a level playing field. And actually, the US charges 2.5% on UK cars and we charge 10% and more. I can’t see why we wouldn’t just drop that entirely especially as the tariff is on the VAT as well.

Significantly, after the Trump/Starmer meeting in Washington, Trump didn’t rule out tariffs on UK goods. He is, of course, a businessman, and you never agree to anything until everything is agreed and you certainly don’t reduce your negotiating position at any point until you get what you want.

The most interesting thing is that Trump is getting his way slowly but surely in quite a number of areas. If only our own people would learn from him, even if you don’t like him.

Post Script...

The announcement by David Sacks, head of the White House Crypto and AI taskforce, that the United States intends to set up a cryptocurrency reserve has galvanized the entire industry.

Tied in alongside with the White House summit on crypto, due to take place on March 7, this is a seminal moment for all cryptocurrencies, and the imprimatur the industry has long been waiting for.

No longer to be categorized as a side show or oddity, crypto in all its forms is now firmly set as a mainstream industry to be set beside TradFi and fiat currencies.

This decision will have far reaching consequences and massive repercussions longer term for the digital world and cryptoverse.

President Trump has stated that he wants to make America the crypto capital of the world.  Now, not only will America have the biggest reserves in the fiat world but as time goes by it will have the same in the crypto world.

If you haven’t been following crypto before, now is the time to learn about it and see all it can do.