Even after the pausing of some of the biggest of "Liberation Day" tariffs, effective US tariff rates mark the highest import tax burden in a century. This is reversing decades of multilateral and bilateral trading agreements adopted under US-driven globalisation after the Second World War. President Trump has described his tariffs as the "medicine" necessary to correct outstanding trade imbalances.

Initially, the U.S. Congress held the power to set tariffs, with the president imposing them in certain situations, such as national security concerns or economic emergencies. But the executive branch has taken a dominant role in U.S. trade policy due to Congress delegating significant authority to the president through laws like the Trade Expansion Act of 1962 and the Trade Act of 1974. These laws granted the president more flexibility in negotiating trade deals and imposing tariffs, often bypassing detailed congressional approval. As global trade grew more complex and fast-paced, the need for swift action in trade negotiations made it more practical for the president to handle trade policy.

For the past 50 years, Congress has been reluctant to take on the responsibility of negotiating trade deals, delegating these powers to the executive branch. But the concentration of trade power in the hands of the President is now being questioned. Critics argue that it undermines the constitutional balance of powers by giving the president too much authority to unilaterally impose tariffs and negotiate trade deals. This shift has sparked debates about whether such executive dominance over trade decisions is in the best interest of the U.S. economy and its democratic processes. On the other hand, since 54% of U.S. families have market-based retirement plans, making them vulnerable to the volatility in stock markets, members of congress confront risks for the economy alongside their own concerns about the political consequences for the 2026 mid-term elections. In this environment, calls for a reevaluation of these executive powers, suggest that Congress may reclaim more control over trade policy.

i. Four Key Questions

The tariff issue is undeniably complex with many interrelated aspect, but the following four questions are central to the ongoing discussions about tariffs and trade policy, particularly within the context of how tariffs impact the U.S. economy, global trade dynamics, and long-term economic stability.

The Impact of Uncertainty on Economic Activity

There's a strange rhythm to the way uncertainty unfolds. It's not always the obvious market plunge or the dramatic fall of a stock that signals trouble; more often, it's the quiet retreat. Businesses stop investing, consumers stop buying, and everything slows down-imperceptibly at first, but eventually, it becomes undeniable. When a company can't predict where its costs will land or whether its product will remain competitive in a few months, it doesn't just pause its expansion plans; it stalls the entire machinery. Likewise, when consumers feel the pinch of rising prices or worry about their job security, they lock their wallets tighter. In the end, the real casualty is growth itself. Can the economy recover from a blow like this when the source of the pain is so hard to quantify and even harder to reverse?

Tariffs as a Sales Tax on Consumers

Imagine a world where a modest hike in price is enough to change your purchasing decision. That's what tariffs do. They don't just make a good less affordable; they change how we think about it. A $10 foreign product suddenly costs $13 with a tariff, and what happens? The consumer moves towards the $12 domestic option, paying a little more, but still feeling like they got the better deal. It's a hidden sales tax, and the consumer feels it every time they reach for their wallet. In this world, it's not just big-ticket items that get more expensive; everyday goods the ones we rely on without thinking-become subject to the whims of international trade policy. What happens when the price increase is across the board, and consumers are left with no good options?

Currency Dynamics and the Competitive Impact on Exports

Tariffs don't just change the prices of goods; they reshape the entire global commerce landscape. The idea is simple: impose tariffs, make foreign goods more expensive, and in theory, reduce imports, which should decrease demand for foreign currencies. This would lead to a stronger U.S. dollar since fewer people need to exchange dollars for foreign currencies. However, this isn't great for exporters suddenly, their products become more expensive abroad, making them less competitive. The very tariffs meant to favor domestic goods could make American exports less attractive. In reality, the dollar's value is driven by a complex web of factors. Tariffs spark economic uncertainty, and that uncertainty tends to erode confidence in the dollar. Investors might see the U.S. dollar as riskier than before and shift to assets they perceive as safer, like gold or other currencies. The result? Instead of the dollar strengthening, it weakens, as we've seen in recent weeks. So, when tariffs cause disruptions, inflation fears and market volatility lead to the kind of sell-off in the dollar that most financial strategists could have anticipated.

Here is the bigger question though: given the recent volatility in the dollar and the global response to tariffs, how much should we consider the potential long-term consequences for the U.S. if the dollar's status as the world's primary reserve currency is eroded? What does this mean for the stability of the current global economic system?

The Misguided Assumption of Tariff Revenue and the Need for Policy Change

Everyone loves a good assumption, especially when it fits neatly into a narrative. The theory behind tariffs is seductive: raise the prices of foreign goods, collect the tax revenue, and use it to fund the domestic economy. But the reality is far messier. Sure, the U.S. might collect hundreds of billions in tariffs, but those dollars come at the expense of consumers and businesses that face higher costs and less demand. The simple math seems to work on paper, but it certainly falls apart in the real world, where the macro-economic implications of protectionist trade policies may negate the revenue gains, and retaliation can certainly lead to broader economic damage. At some point, US policymakers will acknowledge that the trade-off between their wish for "tariff revenues" and economic stability might be too great, and that the costs of a protectionist approach could undermine the very foundations of their economic wealth that they seek to protect? This question also points to a broader governance challenge. When policies are crafted for certain political benefits without the benefit of our economic experience and thinking, the likelihood of missteps grows. A fragmented, reactive approach, rather than one rooted in foresight and coordination, can transform what seems like a sound policy into a major setback for a nation's and for our globe's future prosperity.

ii. The Global Shift Against U.S. Trade Policies: Exploring the Risks of Trump's Win-or-Lose Trade Challenge

President Trump's view on trade wars, where he sees them as a win-or-lose scenario, sets the tone for his aggressive approach to tariffs and negotiations. This perspective frames tariffs as powerful leverage, but the question remains: what are the real risks and consequences for the U.S. economy in such a high-stakes confrontation? Economic theory says that the impact of a tariff varies depending on whether the imposing country is a "large" or "small" economy. A large open economy, like the U.S., can influence global prices, meaning that when it imposes tariffs, foreign producers may lower prices to retain market access, leading to a "terms of trade gain" for the U.S. In contrast, a small open economy cannot influence global prices, so the tariff causes a direct price increase on imports, with no terms of trade gain and a reduction in trade volume. Only in special cases, small economies can influence global trade, such as when they control critical commodities like certain minerials or oil, or through strategic alliances, like Opec.

In simpler terms, when the U.S. imposes tariffs, it can often push foreign producers to lower their prices to maintain access to the U.S. market. This helps soften the impact of the tariff on U.S. consumers and businesses. However, the overall trade volume will decrease because higher prices reduce demand for imports. The impact of tariffs is therefore more beneficial and less damaging for larger economies, whereas smaller economies face a more direct cost without any offsetting benefits. Now, what if the major economies of the world were to challenge the U.S. and retaliate with tariffs or other trade barriers specifically designed to affect U.S. economic interests? Think about the trade ties between Canada, the EU, the UK and Australia, especially after the US introduced the 2025 tariffs. The U.S. could face significant challenges, despite being a large open economy.

What may happen or is already happening?

One of the immediate consequences would be higher import costs. As a major consumer of global goods, the U.S. would see the prices of imported products-ranging from electronics to clothing-rise significantly. This could trigger inflation and reduce the standard of living for American consumers, as everyday items become more expensive. In such a scenario, both sides would continue to raise tariffs, which would harm businesses, consumers, and potentially stall global economic growth.

The U.S. industries that rely on international trade, such as agriculture and manufacturing, would likely suffer the most, leading to job losses. In this case, without its usual leverage to influence global prices, the U.S. would lose its "terms of trade" advantage, meaning it would bear a greater portion of the cost of tariffs without any price reductions from foreign producers to offset it. Furthermore, disruptions in global supply chains would lead to shortages of goods and production delays, further hurting U.S. businesses and consumers. Several other factors could exacerbate the situation, such as export controls on key specialty materials, which are essential for the production of high-tech electronics, military equipment, and electric vehicle batteries. A restriction in access to these materials could significantly raise costs and disrupt the manufacturing of advanced systems, putting both certain high-tech and military sectors at a disadvantage.

Another potential issue would be shifting energy trade patterns. If other nations impose tariffs or export restrictions on energy resources like oil and natural gas, the U.S. could also face trade and supply disruptions. Since February 2025, the U.S. has faced several disruptions impacting key industries. The semiconductor shortage continues, with rising tariffs on imports driving up costs for companies like Nvidia and AMD, hindering efforts to boost domestic production. Meanwhile, U.S. refiners are facing difficulties processing more domestic oil because their infrastructure is mainly built to handle heavier crude oils, like those from Canada, Venezuela, and Mexico. U.S. refineries still rely on imported heavy crude as domestic production of light shale oil, while increasing, does not match the infrastructure's needs for heavier oil grades. Therefore, the cost and stability of heavy crude imports should have a significant impact on U.S. petroleum markets.

Lastly, disruptions in the supply of aircraft parts or military equipment could directly affect major U.S. industries like aerospace and defense. Companies such as Boeing could face production delays or higher costs if key components, like avionics or titanium alloys, are subject to trade barriers or shortages. Similarly, the defense sector could be impacted by delays in the manufacturing of military equipment, including advanced aircraft, weapons systems, and vehicles.

Likelihood of Global Coordinated Responses to Trump's Trade War and Possible Scenario

If you had asked before Feb 2nd, almost all strategist would have said that such a scenario would be extremely unlikely. The global economy is, afterall, deeply interconnected. Many countries rely on access to the U.S. market for their own economic growth. A coordinated effort to retaliate would not only harm the U.S. but also those who do so. Aside its dominant economic and political force, the U.S. continues to hold significant influence in financial markets, technology, and military alliances, which makes the chances of a global coalition targeting the U.S. quite unlikely. In addition, the U.S. has historically used its diplomatic and trade negotiating power to form alliances and resolve conflicts, often relying on international organizations like the WTO to safeguard its economic interests.

Since this March, there are however some significant signs of escalating trade tensions. The most prominent recent example is the trade war between the U.S. and China. The U.S. also saw trade tensions with the European Union, Canada, Mexico, and other nations. There has also been moves toward economic regionalism in recent years. For instance, China's Belt and Road Initiative and the Regional Comprehensive Economic Partnership (RCEP), which involves countries across Asia and the Pacific, are seen as efforts to reduce dependence on the U.S. and shift trade away from U.S.-dominated systems. Similarly, countries like the EU and Japan have looked to strengthen their economic relationships with each other, potentially reducing reliance on the U.S.

Possible Scenarios

What potential scenarios should investors anticipate? In a hypothetical scenario, if the EU and other major economies decided to unite against the U.S., it could happen if they believed the U.S. was undermining global trade agreements. However, it's unlikely that many countries would join forces, as doing so would harm their own economic interests. A more realistic scenario would involve countries within organizations like the WTO or G20 taking coordinated action against U.S. trade policies, which might include legal challenges or other forms of economic pressure. Such actions would likely be pursued through diplomatic channels rather than a direct coalition against the U.S.

While it's unlikely that the entire world would "gang up" on the U.S., there are growing signs of trade tensions and a shift toward regionalism and protectionism that could pose challenges for the U.S. in the future. These tensions could lead to more coordinated actions from certain countries or economic blocks, but a truly global effort to isolate the U.S. would be difficult to achieve, given the economic interdependence of the world and the U.S.'s continued global influence.

Given the weight of the US economy, the possibility that President Trump again escalates the trade war puts stress on the global economy at large. China plays a pivotal role here as the world's largest economy in terms of purchasing-power-parity. After the U.S. imposed 50% tariffs on Chinese goods, China responded in kind, matching the tariffs and imposing 34% reciprocal duties on American imports. Additionally, China restricted the export of critical rare-earth minerals, marking a shift from its traditionally more patient, lower-conflict trade strategy. This escalation occurs at a fragile time for China, as the country already faces a structural slowdown and deflation, amplifying the need for government spending to counter the economic damage from the trade war. The result is an increased strain on China's financial stability, adding to already-existing risks in the global economy.

In 2024, the EU exported goods worth approximately €531.6 billion to the United States and imported goods totaling about €333.4 billion, resulting in a trade surplus of €198.2 billion, according to the European Commission. This means that the U.S. was the largest partner for EU exports, accounting for 20.6% of extra-EU exports, and the second-largest partner for EU imports, representing 13.7% of extra-EU imports. The leading EU exporters to the U.S. in 2024 were Germany (€161 billion) and Ireland (€72 billion), followed by Italy (€65 billion).

The EU's economy is also under pressure with the U.S. being its largest export market. The EU announced plans to impose tariffs of up to 25% on about EUR 21bn worth of U.S. goods, though these tariffs are suspended for now to allow for negotiations. Germany, with its large trade surpluses and significant trade with the U.S., is most vulnerable. An escalation of trade tensions could further complicate the ECB's plans for economic easing, creating a tougher policy decision for the central bank.

iii. Implications for the Currency Markets

The US Dollar is now affected by the global inflation dynamics and central bank policies in response to stagflation pressures. The U.S.'s trade policies add further uncertainty to the ability of central banks, particularly the Fed, to manage economic stability. The U.S. dollar finds itself in the crosshairs of a shifting global economic order. With the Fed poised to keep interest rates steady, while the European Central Bank or Bank of England potentially cutting rates to stimulate growth, the dollar is expected to face a period of relative weakness. The key concern will the Fed hold its ground, or will it be forced to follow the pack? If the Fed stays on the sidelines, expecting ECB or the BoE to cut rates, The dollar could get weaker as other currencies grow stronger.

The specter of stagflation in the U.S. puts the Fed in a tough spot. The more inflation climbs without an economic pickup, the more the dollar suffers. This can become especially problematic if investors start doubting the Fed's ability to manage inflation. With inflation eroding the real value of the dollar, the currency could slide further as the U.S. economy stagnates. The countries that avoid retaliatory tariffs and benefit from cheaper goods routed away from the U.S. could see their currencies strengthened against the dollar. The trade war between the U.S. and the rest of the world becomes a game of musical chairs, and the dollar risks being left without a seat if other nations continue to get a break from high prices. In the short term, this dynamic could also leave the dollar in a vulnerable position. In the medium term, the effects of the trade war could worsen, causing a persistent inflationary environment in the U.S. As prices continue to rise, the Fed's interest rate decisions-no matter how aggressive-may not be enough to halt the dollar's slide, especially if other central banks act more decisively. The real question investors will be asking is whether the dollar can maintain its stature as the world's dominant currency when inflation runs unchecked and global trade fractures further.

USD Weakness Ahead?

The EU, Canada and Australia tightening trade links post-U.S. tariffs isn't just a geopolitical shift-it's a signal. For FX desks, it points to reduced USD trade exposure and a gradual diversification of global flows. That structural pivot tends to be supportive for CAD, EUR, and AUD, especially if backed by policy alignment and trade volume growth.

Tariffs introduce friction. Markets respond with volatility, but institutional flow hunts for clarity beneath the noise. When traditional partners pivot, it triggers real capital reallocation. Multinationals hedge differently, and sovereigns may rebalance reserves. All of this feeds directly into FX positioning.

Trade ententes also reframe the growth outlook. If Australia and the EU are tightening supply chains and striking bilateral deals, desks start pricing in medium-term growth premiums. That can support yield expectations, even in a flatter global rate environment, keeping AUD and EUR bid relative to USD. Ultimately, it's about narrative control and forward guidance. If these blocs are seen as policy-cohesive and trade-adaptive, FX markets reward that with premium pricing. USD might remain dominant, but in a reoriented world, it's the cross-currents that start offering the real edge.

For the investor, this shift signals a strategic opportunity to lean into currencies and equities tied to economies diversifying away from U.S. trade reliance-namely the CAD, EUR, and AUD. With trade blocs like Canada, the EU, and Australia reinforcing ties, the growth outlook stabilizes and policy risk softens, making these regions more attractive on a relative basis. The play here isn't just long USD-it's selectively long the currencies and assets of trade-adaptive economies, especially in crosses like EUR/AUD or CAD/EUR, where structural tailwinds may be underpriced.