Markets Weekly podcast

Julien Lafargue (JL): Welcome to a new edition of Barclays Markets Weekly podcast. My name is Julien Lafargue, Chief Market Strategist here at Barclays Private Bank, and I will be your host today to discuss US tariffs. And for that I will be joined by Lukas Gehrig, our Head of Quantitative and Macro Strategies here at Barclays Private Bank. 

We have a lot to discuss, but maybe we should set the scene. Hopefully, by now you all have heard, read or seen the announcement made by President Trump and his administration when it comes to reciprocal tariffs.  

Now, let’s set the record straight. These are not reciprocal. A reciprocal tariff is if you tax me 10%, I’ll tax you back 10%. The tariffs that were announced last week are actually much worse. In fact, they are more or less baseless. And for that I would refer you to the formula that was used by the administration, which basically just looked at every country in the world, and maybe more on that in a second, and calculated the US trade deficit with that country, and then divided that number by the US imports from that country. But because, of course, Donald Trump wanted to be, and I quote, kind, the ratio was then halved. It makes no economic sense, but this is the methodology that was used. 

So, this methodology is clearly questionable, but so is the scope of those tariffs. I’m sure you’ve seen that 10% tariffs were imposed on an island inhabited by no-one but penguins. While this is both ridiculous and, to some degree, maybe funny, this blanket approach is a real issue for the poorest countries, because they are being slapped with tariffs but clearly won’t have the means by which to buy any manufactured goods in the US.  

For example, Lesotho and Madagascar will soon be subject to a tariff of 50% and 47% respectively. And Lesotho, I think, is a good example, because this is a country that exported less than $250 million worth of goods to the US in 2024, and most of that, by the way, was in the form of pairs of jeans.  

This is 10% of Lesotho’s GDP, but it’s nothing in comparison to the $1 trillion that the US is running in terms of a global trade deficit. So, Lesotho only imported $3 million worth of goods from the US in 2024, and there is a very good reason for that. The reason is simply that 50% of the population in this country lives below the poverty line. The unemployment rate is above 25%. So, clearly this is a problem. It’s a problem for developed economies, but it’s also a problem for emerging markets. 

Now, two other very quick observations that I would make just to highlight how, I would say, irrational those tariffs are. First, as a Frenchman, I can say that La Réunion, which is a French territory off the coast of Madagascar, was slapped with a 37% tariff despite the fact that this is a French territory and, therefore, part of the EU, which was tariffed at 20%, so some inconsistency there. 

The other key question I have, is how Beijing is going to react seeing that Taiwan was listed by the White House as a single country and will be subject to a 32% tariff. China, which considers Taiwan as being part of it, is probably not going to like that.  

But, look, beyond all these anomalies, I think, for the lack of a better word, these tariffs are a gamechanger in both the short and the long term. First, because the US is now fighting a global trade war and, importantly, other countries are not, ie it’s one versus 180, and it’s hard to win a war when you’re everyone’s common enemy.  

So, despite the strengths and the relevance of the US economy, it represents only, quote/unquote only, a quarter of the world’s GDP and, as such, we’re likely to see new alliances being formed which could ultimately alienate the US and at least greatly diminish its sphere of influence. 

But even if we assume that these are only negotiating tactics, how do you strike a deal with more than 180 counterparties in a short amount of time? Just to give you an idea, the Office of the United States Trade Representative, the USTR, has no more than 200 employees. So, even if we were to give each employee a country to deal with, that’s going to be a very, very difficult task. 

So where does that leave us? Well, I think, first, it’s hard to argue that this is not a massive own goal on the US part and even if President Trump were to roll back these tariffs tomorrow, which he probably won’t, the chaos and the uncertainty that they have created will have a long-lasting impact, both domestically and internationally. 

In the short term, I think a US recession is becoming a real possibility, and so is an inflationary shock. At the same time, because they don’t have the visibility that they crave, investors are also likely to pull out capital from the US, resulting in an exodus of capital, which is what we saw last week with both equity markets, alongside the US dollar, coming down sharply. 

These were some initial thoughts, but I think maybe Lukas, I can bring you into the conversation. We have published today our April edition of Market Perspectives, our monthly publication. And in this publication, which we wrote ahead of ‘Liberation Day’, we thought it would be a good idea to discuss more fundamentally what tariffs are, how they work and what is their impact, not taking necessarily a strong view on whether the tariffs that the US wanted to impose were a good or a bad choice. 

So, maybe you can start by giving us a brief highlight or takeaway from your piece this month, and then I’ll ask you more questions as to how you see the world going forward? 

Lukas Gehrig (LG): Well, thank you for having me, Julien, and hello to all the listeners. I think one thing that’s very important is you just mentioned that the US economy represents around one-fourth of the world economy now, and this is important, because at the time when the institutions that guided trade over the last half a century were built, it was very different. 

Back then, the US was closer to half of the global economy, in terms of GDP, and was an absolute hegemony in many domains. So, they had dominance not only militarily and financially, but also in trade, and you could say culturally as well. And under this hegemony, these institutions, including, for example, the World Trade Organization, were built and the rules were set out to benefit trade, which, in theory, would benefit everybody. 

Now, over the years, as globalisation got fuelled, this became an issue for some parts, especially in the ‘old’ economy in the US. With the country’s financial dominance, you have this feature that the US dollar is attractive to anybody because it is, and we wrote about this earlier on, the global reserve asset. It is the way to park money and, therefore, there is going to be a demand for the dollar that has nothing to do with its economy, but more the dollar, as the function of the global reserve asset. 

Now, why is that an issue? Well, that’s an issue because, especially when the global economy is slowing down, the US dollar appreciates, and this accelerates any change in the economy when it comes to its ability to export goods, because when the world has less appetite for trade, the US on top becomes more expensive. So, that has certainly accelerated this downfall that Donald Trump is begrudging in the US manufacturing sector, things that he wants to set right now.  

And on the other hand, you called the tariffs imposed that were imposed “baseless”. I would agree with regards to the maths, but, of course, there are differences in the way countries are approaching trade. So, for example, VAT, which is something that the Trump administration has mentioned leading up to Liberation Day. VAT is treated differently around the world.  

In the US, you have around 8% on average of value added tax, versus, in the EU, you have 21%. And the administration has been saying that this is an unfair export subsidy that the EU is giving its exporters. And there is some truth to that. However, what is baseless then, also in my regard, is the formula that they came up with and that formula, you just laid it out, I would describe it as the symptomatic treatment. So, it’s taking the state of the world right now and trying to derive tariffs from a wild mix of effects that are all bundled together in this one number. 

JL: Yeah, but again, I get the VAT argument, right? 

LG: Yeah. 

JL: But if you’re really thinking about reciprocal tariffs, you’re saying, OK, you’re taxing us that much and, on top of that, you have VAT. One plus one equals two. This is the number we’re going to apply to your imports, right? And that would be reciprocal and that would almost make sense. And I think markets would have welcomed that, because it’s just reasonable. 

Here, as you said, we’re planning a raid to just a trade deficit figure, which means nothing really. 

LG: Yeah, you’re absolutely right. And I spent a long time thinking about a good example, and here’s what I came up with. So, imagine that the US used to build iPhones from scratch, and now trading partners, they can build one component of those iPhones more efficiently than the US and, therefore, that’s trade. 

So, all the trade partners they ship to the US and they buy that many finished iPhones back. That would be fair trade by Donald Trump’s interpretation, and I think this is ridiculous and baseless, yes. 

JL: All right. Look, let’s move on to the US economy, because, and I haven’t mentioned that simply because it felt totally irrelevant in the context of last week’s announcement, but we did get some economic data last week in the form of the ISM manufacturing and services surveys, which were, I would say, probably on the weaker side. But we also got a very strong US jobs report.  

So, of course, those numbers are irrelevant simply because now the game has changed, but as we were going into Liberation Day, how do you feel the US economy was faring and do you think it’s on a strong enough footing to absorb that shock? 

LG: Well, I feel horrible for Fed chair Powell, because the central bank was on the finishing stretch of delivering a ‘soft’ landing that we’ve been talking about for two years now. And, as you said, the jobs reports were positive, but still you could really see the tipping point. So, it really looked as if inflation was well under 3% and the consumption momentum tipping, labour also around the tipping point, so it looked as if the Fed had achieved their goal.  

That said, the goal of the Fed was a very soft, or even fluffy, landing and that’s where they were when the Trump tariffs hit. So, the US economy could be in much worse shape. So, yes, that’s a positive. 

JL: And I think one thing that disappointed the market last week, as well, was the speech that chair Jerome Powell gave in which he just basically acknowledged the risks to the outlook without necessarily giving a clear indication that, you know, the Fed would step in if need be. 

Now, the one thing that we’ve seen and we had Bhaskar on the podcast, I think it was last week, talking about FX markets, and one thing that we’ve seen clearly on the back of those tariff announcements, was a weakening of the US dollar. 

LG: Yeah. 

JL: And that’s an interesting development because three months ago, people associated tariffs with a stronger dollar, but it now looks like this has reversed the same way that people thought Trump would be “amazing” for the US economy. Well, he might be in the end, but he’s not in the short term, for sure. So, how do you think about, you know, currency, and the dollar in particular, given what’s happening at the moment? 

LG: Well, that is a huge issue for the Donald Trump plan to come to fruition. If you read the papers that guide this whole idea of Trump reordering global trade, you’ll see that a lot of the argument that they’re making, is banking on the fact that the US dollar would appreciate, and that would offset some of the inflationary shock that otherwise US consumers would get from slapping 23% of tariffs on to their imports.  

And the US economy right now needs imports, they just are so globally interlinked that they cannot shut their borders. So, there will be an inflationary surge and US dollar appreciation could have softened that blow. Now, we are three days in, things can still change or turn around, but it’s unlikely to see the dollar appreciating by 23%. 

JL: Great. OK. So, the other question I had for you, because it’s a question I’m asking myself, is where do we go from here? I have my own view and I think that was basically an opening bid on Donald Trump’s side. This situation is clearly not sustainable, so these tariffs will most likely come down. I’m not so sure about the 10% universal tariff, that might stick, but all the rest is probably going to come down at some point.  

And, you know, there are a few reasons for that. First, because the US economy is clearly going to suffer, and if the economy suffers, Donald Trump’s approval rating is likely to suffer. I think we’re also starting to see some dissension within the Republican Party. Over the last few days a senator from Iowa, a Republican senator actually, introduced a bipartisan Bill aimed at allowing Congress to reclaim authority over tariffs. Basically, the Congress would have to approve any tariff being imposed on any country within 60 days. 

Now, this probably hasn’t a chance of seeing the light of day, when it comes to the House, but if the situation continues the way that it’s been for the last 48 hours or so, there might be a point where Congressmen and Congresswomen in the US start to fear for their seats as we go into the mid-term election, and that might change.  

So, I do believe that we’re going to see lower tariffs, but I don’t necessarily think that tariffs are going to be totally rolled back. Is that something you agree with? Do you expect more retaliation maybe from other countries? 

LG: A retaliation is an interesting thing, right, because there’s countries who are better at it and countries who are worse at it, just by the nature of how they trade with the US. So, for example, China’s decision to reciprocate with 34%, that’s going to hurt them a lot, because of China’s imports, a quarter are agricultural goods that they cannot easily source otherwise, and one-third is machinery and equipment.  

That part is similar when you look at the EU, for example, but the EU’s goods basket is much broader. So, if the EU wants to retaliate, and that’s what they did in the last escalation of global tariffs, then they can make or land ‘precision strikes’ that could also be aimed, politically, where it hurts the Republican Party the most. 

And, let’s not forget, China wasn’t only sticking to trade. They also introduced these controls on the exports of rare earths. The EU, for example, could open up the discussion of taxing or controlling services, where the US is the largest exporter actually. So, those are not off the table and, therefore, I think it’s a very bold bluff that Donald Trump started with, and it might be culled. 

JL: Yeah, and I think there is a very interesting meeting today that we need to pay attention to. By the time this podcast is out we may know the outcome of that meeting. But it’s the Israeli PM Netanyahu flying to Washington to meet in person with Donald Trump. And it’s an interesting meeting because, if you remember, in the weeks leading to Liberation Day, Israel announced that it would bring their tariffs towards the US to zero, in the hope that they would basically escape any tariffs from the US on Liberation Day. 

And the reality is they were slapped with, if I remember correctly, a 17% tariff. And I think this is an important meeting because if PM Netanyahu can leave that meeting with an agreement that the US will actually do what Donald Trump said he would do when he was, indeed, referring to reciprocal tariffs, again, we’re not so much talking about reciprocal tariffs any more, but if Israel goes to zero in terms of tariffs then the US should do the same. And if Netanyahu can secure that, that gives other world leaders a blueprint of what can be achieved if you’re willing to negotiate with the US, and I think that could be very well received by markets. 

Now, I just want to conclude on one key discussion, which is the one around recession, because you will have seen many different market commentators and strategists calling for a recession, or at least an increased likelihood of a recession, which I think is totally fair. But we also need to bear in mind what recession means, right?  

There are different types of recession and a recession is not necessarily what we saw in 2008, that was a financial crisis more so than a recession, and I think we need to realise that a recession is simply a couple of quarters of negative growth in the US. If I look at our investment bank updated forecast, it’s now pencilling in a recession in the US in Q2 and Q3 this year, yet the full-year growth number is still at 1.1%, so it’s a very mild and short-lived recession that they are potentially anticipating. 

Do you share that view that we could see negative growth, or are you more concerned maybe on the inflationary side? 

LG: Well, both are concerning in a way. I would agree with you that let’s not imagine a 2008/09 kind of shock, because if I look at those projections that investment banks have just come out with, I think they are calculating those with smaller tariffs than were actually announced, that can also then soften a bit the inflationary blow and consumers will be on the streets and in upheaval, and that should bring Donald Trump to reason.  

Therefore, I think the inflationary, and imagining an inflation wage-spiral, scenario is not my base case right now, simply because either it cracks the economy or they will be rolled back. By cracking, I mean a fracture and not an abyss, as in 2008 and 2009. 

JL: Yeah, and I think that if forecasts on recessions are right, inflation is unlikely to become a problem. We might be talking about deflation at some point. Anyway, thank you very much for joining us today. I encourage everybody to have a look at the article that you wrote for this month’s Market Perspectives. We’ll definitely have you back but, before I let everybody go, a couple of things. 

One, in terms of what to watch for this week. Again, these datapoints might not be very relevant. I think all eyes will be on Washington, but still US CPI, US inflation on Thursday, as well as the Michigan consumer sentiment on Friday. I suspect that survey will have been done before Liberation Day, so probably not fully reflecting the impact of those tariffs on consumer sentiment, but still an interesting indication. 

And in terms of investment implications, I think I’d like to reiterate the fact that we’ve been talking about the importance of diversification for a while now and, whether it’s geographically or across asset classes, we continue to believe that appropriate diversification is a must.  

We are also seeing increased dispersion within asset classes. Last week, believe it or not, about two dozen stocks in the S&P 500 were up. Meanwhile, some fell as much as 25%. Similarly, at the sector level, US consumer staples, a sector that we’ve highlighted in our Outlook 2025, that sector was up 0.6%. 

So, chaos creates opportunity and let’s say that it’s pretty chaotic at the moment out there. But, to finish on a positive note, I would just highlight that the VIX, the fear index in the US, has closed on Friday above 45, 45.31 to be precise. We’ve been through that level to the upside only six times in the last 35 years or so, and six out of those six times, so 100% of the time, the S&P 500 was up more than 20% 12-months later. But, of course, past performance is, as we know, not an indication of future results, but we can confidently say, I guess, that there’s a lot of bad news priced in already. 

With that, thank you as ever for listening. We will be back next week to debrief any news on the tariff front or on the economic front and, in the meantime, and we truly mean it, we wish you the very best in the trading week ahead.