When will America do the right thing?

It was reputedly Winston Churchill who said, "you can always count on the Americans to do the right thing - after they've tried everything else". Given the volatility recently seen in markets, we appreciate it might sound overly optimistic to use that quote today. Certainly, we (and the markets) underestimated the degree and intensity of disruption at the start of this new administration. We had focused on the promise of deregulation and lower taxes and misjudged the scale of the attack on the post Bretton Woods global system. And what has really confused the markets is the incoherence of some of the actions taken.

Fortunately, there are regulating elements - including the bond market and feedback from corporate America - which we think are acting as a check on some of the more erratic policies.

What do we know about Trump's plans?

One of Trump's central aims is to decouple from China, which he views as a rival to the US in terms of both trade and technology innovation. Attention so far has focused on broad trade tariffs. Longer term, the US' goal is technological dominance, particularly in the AI race. The disruptive impact has already been seen and will continue while uncertainty prevails.

Trade uncertainty extremely high

Source: Bloomberg 12 April 2025.

While the focus on China was expected, what came as more of a surprise were the attacks on other countries that the US corporate sector will need to deal with. Vietnam, for example, has much lower labour costs than China and has been a beneficiary of shifting supply chains - Nike produces 50% of its footwear in the country¹ - yet is still subject to tariffs.

Since the flurry of announcements on 'Liberation Day' and subsequent reversals, a more coherent approach to tariffs seems to have been adopted, although things still change day to day.

The other side to the tariff equation is that the revenue raised from these taxes on imports will be helpful in keeping taxes low, a key pledge of the new administration. A 'reconciliation' bill (which requires a smaller majority to be passed) is currently being worked on, which will turn Trump's domestic policy agenda into law. It will address taxes, spending and the deficit.

On the tax side, the intention seems to be to extend provisions of Trump's 2017 Tax cuts and Jobs Act, some of which are due to expire at the end of the year. There are also likely to be proposals for further personal tax cuts.

The bill will also include spending cuts, with Medicaid and SNAP (food benefits for lower income families) both being potentially under threat. Several senior Republicans have indicated that these cannot be touched. The proposals certainly introduce significant political risk to the Republicans at the mid-term elections. For now, the Republicans cannot agree on the targets - house committees are instructed to cut at least $1.5 trillion in spending, while the Senate has $4 billion as a minimum².

We think the near-term effect of all this is likely to be stagflation - inflation with little or no growth. Longer term, there will be prolonged uncertainty. It largely depends on how the tariff policy plays out in terms of companies re-locating their supply chains.

The deregulation theme has taken a back seat since the trade tariffs were announced, although we have seen significant defunding of government agencies. Longer term, as we work through the tariff chaos, we still believe cutting red tape will be very positive for US companies, in particular smaller companies.

What would signal steps in the right direction?

We would like to see lower tariffs on China and elsewhere in Asia and a more productive relationship with immediate neighbours Canada and Mexico. We think progress is being made but timescales are still uncertain.

One thing we are confident of is that the messages from the bond market, economic data (such as the Q1 decline in GDP) and individual companies are being taken on board by the administration. There is still a high degree of uncertainty, but we think America is slowly - in a way Winston Churchill might appreciate - moving towards doing the 'right thing'.