The Virtue of a Proportionate Response

MPS Bulletin: The Virtue of a Proportionate Response

The Virtue of a Proportionate Response

February 2025. by PM

Whilst Donald Trump may not be well versed in the treaties of David Ricardo, and all the benefits that are bestowed when the law of comparative advantage takes form in a globalised manufacturing model, he does seem to be familiar with Sun Tzu’s counsel. ‘The best battles are those never fought’, as the Confucian doctrine would have it and both Washington and Beijing seem to have engaged in a choreographed tariff tango that currently translates to little more than political theatre.


A 10% tariff from the ‘Tariff Man’, pales into insignificance when cast in the light of the 60% proposed during the campaign rhetoric. The current US administration knows that China cannot lose access to the largest consumer market in the world, currently accounting for 15% of PRC exports. China’s economy is still beleaguered in a debt deflationary trap, and as the air continues to seep out of the property market’s seams, does not have the stomach for a game of economic chicken, which could escalate into a full-blown trade war.


It's not surprising therefore that President Jinping’s response was measured – import duties on some 80 odd US products, and the launch of what might be a meddlesome, pointed, politically motivated interference with the US’ tech armada. Apple’s AppStore commission structure will be investigated, and Google will bear an anti-trust probe.


The sharp appreciation of the US Dollar against the Chinese Yuan was short lived, as investors breathed a collective sigh of relief. Contagion in Southeast Asian currencies has form in the crises of 1998, and a sharp devaluation of the Chinese currency also rattled markets in 2015 causing a 20% correction in many risk assets including global equity indices.


It will also not have gone unnoticed in 1600 Pennsylvania Avenue that the Chinese hold 780bn USD of US Treasuries, and the spectre of a bond market meltdown is not appealing to a property developer who has been on the wrong side of higher interest rates on many occasions.


Maple Disbelief

Whilst Canada and Mexico do not have the same punching power as the Middle Kingdom, President Trump’s sallies across its domestic borders do seem more draconian. They also have the potential to become a significant economic own goal, given the likely inflationary consequences of a 25% ‘anything but neighbourly’ trade tax.


The US imports from Alberta and refines in the Mid-West roughly 4mn barrels of crude oil a day. Should the 30 day stay of execution expire, and these become a reality, some estimates have a 70 cents implication for petrol pump prices for the very low income MAGA heartlands, which are so central to his political base. Moreover, under NAFTA, some 80% of the auto parts assembled by the ‘Big Three’ of Detroit come from Canada and Mexico – car prices could easily be 3,000 USD higher in the stroke of a pen.

Whilst Canadian consumers will be minded to stage an unofficial embargo on US products wherever possible, it would be seem just as legitimate for President Sheinbaum of Mexico to be suffering a similar concussion. The economic colossus north of the Rio Grande accounts for 80% of Mexican exports and voluminous FDI flows into the States of Sonora, Chihuahua and Coahuila, have all been made in nearshoring efforts to build cheap supply chains for the US markets. Such tariffs could bring these capital flows to a sudden ‘wall’ stop, and the Mexican Peso is responding in kind – falling nearly 4% in a matter of hours.

However, that’s not to suggest that Mexico is completely without the ability to counter. Much of the 400bn USD of exports it sends across the border are quotidian staples for Joe Six Pack – legumes, peppers, avocadoes, tomatoes, Corona and not to overlook an exploding market for Tequila. Food inflation is the most regressive of all the taxes, and beyond that should the economic momentum south of the border shudder, it may well only serve to send more young Mexican men in search of gainful employment beyond the streets of Laredo.


Riviera of the Middle East

Perhaps most difficult to digest in the Presidential soap opera is the notion that Trump branded hotels may yet dot the Gazan Mediterranean shoreline. Running in sharp contrast to the anti-war campaign positioning, whilst a return to ‘maximum pressure’ on the Iranian economy was largely expected, Middle Eastern peace policies rooted in property development punted at press conferences was not.

The suggestion that the Palestinian enclave, largely flattened by Israeli directed munitions, made in the US by its military industrial complex, could be remedied by some sort of Abrahamic gentrification, passes understanding.

It would not be politically possible for Congress to authorise what would amount to a military occupation of a land to safeguard the sales of off-plan condominiums. Perhaps this is all part of a political ploy to achieve some difficult to fathom end, but displacing 2mn Gazans does not seem to have had the consideration it might merit.

Trump’s unconventional political approach may yet reap some unexpected rewards by the end of his second term in office, but being awarded the Nobel Peace Prize surely is beyond the grasp of even the most fertile imaginations in the barren lands of Eilat.


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