Navigating the uncertainty – Trade and foreign policy scenarios for a turbulent autumn
|Ever get a feeling that 2020s are cursed? From a pandemic-induced recession to a war-triggered cost-of-living crisis, the global economy was just recovering when it hit another wall of uncertainty. Businesses and investors need to make decisions in an environment where there is substantial uncertainty around macroeconomic trajectories for growth and inflation. Importantly, our baseline macroeconomic forecast is subject to our assumptions regarding trade policy outcomes and challenged by geopolitical risks.
The ongoing trade war is a perfect example of the erratic policy environment: tariffs were initially set at extremely high levels that seem arbitrary, but they were soon cancelled, almost as rapidly as they were announced. In our baseline, we expect the tariffs to land at moderate, albeit historically elevated levels. If we are right, the US economic growth will slow down but not collapse and Europe will remain on a path towards recovery. But in our negative scenario, tariffs will remain high and the US will experience a recession comparable to the dot-com crisis. European economies, including the Nordics, will take a sizable hit.
While trade policy uncertainty is at record highs, US foreign policy is also undergoing a markable shift. Some elements of Trump administration's foreign policy are familiar from his first tenure and some rhyme well with traditional Republican foreign policy doctrines, but there are some completely new themes as well. Further, similarly to Trump's first tenure, US foreign policy is shaped by this tug of war between the interventionist and the isolationist camps within the Republican party. A perfect showcase of this is the administration's recent contemplation regarding whether to intervene in the conflict between Israel and Iran.
In this report, we lay out a framework for anticipating US trade and foreign policies and the associated economic and market implications. Since uncertainty is so high, we abstain from making accurate trade or foreign policy projections. Instead, we outline three scenarios for US trade policies and discuss three approaches for US foreign policy. Different motivations lead to diverging outcomes. Hence, for both trade and foreign policy, we seek to understand the primary motives driving US decision-making.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.