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Donald Trump’s chaos goes beyond tariffs. Here’s how some are trying to cope
Summary
The world order has shaken up in the past month, but changes in tariff rates are only one part of the story. Donald Trump’s re-entry to the White House has led to these five geopolitical shifts whose link to Trump could be underrated.
To borrow from the Greek philosopher Heraclitus, the only constant in Donald Trump’s second presidency so far is change—in tariffs. Tariff rates and exemptions are constantly evolving in response to market reactions, diplomatic efforts, trade negotiations and domestic lobbying. In keeping track of who is being hit by what tariff, one cannot overlook other, equally important, geopolitical shifts that have taken place in the last month or so and are somewhat attributable to the US president.
China: High on confidence
The annual “Two Sessions" Parliamentary conference in China set an ambitious growth target of 5% for 2025, to be supported through a higher fiscal deficit and looser monetary policy. The announcements made two intentions very clear.
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First, China has decided to battle tariffs with fiscal stimulus. It aims to boost household spending to make up for a fall in export revenue. Key proposals include an expanded trade-in programme for household purchases, revamped leave rules to boost tourism, and the creation of millions of urban jobs. Second, China wants all hands on deck as it braces for impact: There were promises to support private sector growth, fund cutting-edge technologies, and maintain high defence spending.
One can argue that the 5% target is simply a show of confidence. However, China has a track record of never missing growth targets, even if it means more stimulus. The good news? In the process, it may rebalance its economy towards higher household consumption.
Germany: Unlocking ahead?
Incoming German Chancellor Friedrich Merz and his coalition partners agreed on a historical deal to release the “debt brakes" that have imposed strict fiscal restraint on Germany since 2009. The decision was precipitated by Trump's withdrawal of support to Ukraine. The deal proposes to release €500 billion for infrastructure and allow unlimited borrowing for defence spending.
Germany’s debt is much lower than other European economies, so market reactions were largely positive. Growth is forecast to nearly double to 2%, driven by a huge boost to supporting industries.
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The impact of this “whatever-it-takes" debt bazooka cannot be overstated. Germany’s growth can also lift other European countries. At the same time, borrowing costs are set to rise with higher debt supply. Last week, the European Central Bank (ECB) signalled a possible rate pause after it cut the benchmark rate by 25 basis points. The promise of robust growth in Germany will make it easier to hold rates.
Europe: Time to rearm
Trump’s suggestion that the US may not defend member countries of the North Atlantic Treaty Organization (Nato) that don’t pay enough sent shock waves through Europe. This puts into doubt a core tenet of Nato—Article 5—which states that an armed attack on a Nato member is considered to be an attack on all members. Member countries fund the common Nato security umbrella by contributing 2% of gross domestic product (GDP) towards defence spending, of which 20% is carved out for military equipment. As of 2023, the US contributed more than the richest European nations, so there is some basis for Trump’s complaint.
The threat that the US may not come to Europe’s military aid has united and galvanized European leaders. In a summit last week, European Union leaders pledged to support Ukraine and announced a ‘Rearm Europe Plan’, which will mobilize €800 billion through a combination of loans to member states and changes in debt and deficit rules that would permit higher military spending.
Japan: Path to recovery
Japan is at risk of being slapped with reciprocal tariffs as its average tariff rate is relatively higher than the US. It doesn’t help that Japan runs a trade surplus with the US. Unfortunately, aside from asking for an exemption or promising to import more from the US, Japan cannot do much because it depends on the US for security support. The US “nuclear umbrella" is vital given its nuclear-armed neighbours (China, Russia and North Korea).
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The good news is that Japan appears to be on the threshold of an economic recovery. After decades of deflation, inflation is on the rise (4% in January 2025). This time, it is likely to sustain as the price rise is mainly driven by wage pressures. Growth has also been positive (ranging from 1.7% to 3%) for the last three quarters of 2024. The benchmark 10-year yield has gone up in anticipation of a July rate hike, signalling a return to more normal monetary policy.
Panama Canal: Reclaimed?
The Panama Canal is a man-made waterway that links the Pacific and Atlantic Oceans, and greatly shortens the travel time between Asia and the US east coast. The US-built canal was handed over to Panama in 1999. Over 70% of its traffic is headed to or from the US. The US is also the biggest investor in Panama. However, rising Chinese influence and investment in the region has led to fears of surveillance and control.
That’s why BlackRock’s $23-billion acquisition of two vital container ports located at either end of the canal from CK Hutchison, owned by a Hong Kong-based billionaire, is such a coup. Some of the biggest names in global business worked to put this deal together rapidly, suggesting that Trump’s words carry a lot of weight in the corporate world. The question is, will Greenland be next?
The author is an independent writer in economics and finance.
