A Calculated Push

President Donald Trump is shaking up global markets with an aggressive tariff strategy, a move that some analysts believe is part of a calculated effort to engineer an economic slowdown which might then force the Federal Reserve to slash interest rates, weaken the U.S. dollar, and ultimately create a "US-first" economy that prioritizes domestic production over imports.

Additionally, the U.S. fiscal shortfall may not be purely accidental. After the 2017 Tax Cuts and Jobs Act significantly reduced fiscal revenues with little measurable economic impact, Republicans set the stage for a long-term push to cut Social Security. By limiting tax revenue, they created a budget squeeze that makes spending cuts seem inevitable—especially once all other apparent cost-cutting measures have been exhausted.

A Tariff-Driven Slowdown

Trump has imposed hefty tariffs on key trading partners, arguing that the U.S. has been taken advantage of in global trade. The new wave of tariffs targets are disrupting global supply chains and risking higher costs for both businesses and consumers.

  • This disruption is particularly significant as previous trade agreements, such as the USMCA, are thrown into uncertainty, forcing companies to once again reconfigure their supply chains. For industries already grappling with post-pandemic adjustments, these changes add another layer of costs and complexity.
  • Higher costs for imports, combined with retaliatory tariffs from key U.S. trading partners, could further dampen economic growth. But that may be by design.
  • Trump appears to recognize a fundamental reality: the Federal Reserve will not cut rates in a growing economy. Since returning to office, Trump has repeatedly criticized the Fed for keeping rates high, blaming the strong dollar for hampering U.S. exports.

But with high interest rates in the U.S.—while the ECB and other central banks are cutting rates—the dollar has only strengthened, making American exports less competitive.

A Weaker Dollar for a 'US-First' Economy

Trump has long argued that other nations are engaging in de facto currency manipulation. One could point to Germany, which benefits from a weaker currency due to the Euro shielding its manufacturing sector—allowing it to be the world’s second-largest exporter while avoiding the currency pressures that a standalone Deutsche Mark would have faced.

  • Similarly, Trump has often claimed that China benefits from its designation as a "most favoured nation" at the WTO, a status that has historically granted it favorable trade conditions.
  • Faced with these perceived disadvantages, Trump is now attempting to force a course correction by weakening the U.S. dollar through indirect means.

If the Fed refuses to cut rates, the administration’s alternative approach appears to be engineering an economic slowdown through tariffs—making it untenable for the central bank to maintain high rates.

Learnings From 2018 - 2019

A similar scenario played out during Trump’s first term. In 2018, the economy was still expanding, and the Fed was steadily raising rates. However, by mid-2019, Trump's escalating trade war with China—which included tariffs on $360 billion worth of goods—began slowing business investment and increasing recession fears.

  • The stock market tumbled, corporate earnings weakened, and the global economy slowed.
  • Facing mounting pressure, the Federal Reserve reversed course, cutting rates three times between July and October 2019 to counteract the damage.
  • This policy shift weakened the U.S. dollar, boosting American exporters while also lowering borrowing costs—a move that aligned perfectly with Trump’s goals at the time.

For now, the Federal Reserve remains cautious. Fed Chair Jerome Powell has signaled that while the central bank is monitoring the situation, it will not be pressured into premature rate cuts. Still, analysts believe the political pressure on the Fed is mounting, and if the economy slows significantly, rate cuts may become inevitable.

The Trade Balance Issue

The Trump administration is pursuing a strategy of re-shoring industrial production to the United States, largely to reduce the trade deficit, which it viewed as harmful to the economy. However, a trade deficit is not necessarily a sign of economic weakness. By definition, it is offset by an equivalent inflow of foreign capital, meaning that while the U.S. imports more than it exports, it also receives investment in return. In simple terms, a country cannot buy more from the rest of the world than it sells unless it offers something in return—typically debt or financial assets.

For example, imagine a person who spends $1,000 a month but only earns $800. They have to borrow the remaining $200, either by taking out a loan or selling something of value. Similarly, when the U.S. runs a trade deficit, it buys more goods and services from abroad than it sells. To keep this dynamic going, foreign countries invest in U.S. assets, such as Treasury bonds, because they need American consumers to continue buying their goods.

China, Germany And Japan

A prime example is the U.S. trade deficit with China and Germany. These countries run large surpluses by producing goods for American consumption and, in turn, invest heavily in U.S. assets, particularly Treasury bonds. This reinforces the dollar’s role as the world’s primary reserve currency and allows the U.S. to finance its consumption through dollar issuance. In effect, China and Germany accept U.S. debt in exchange for goods, helping to sustain global financial stability while also deepening trade imbalances.

  • This arrangement is particularly beneficial for countries with high savings rates and low domestic consumption, like Japan (but also Germany and China). Japan runs a trade surplus, meaning it sells more than it buys. Since it does not consume as much, it does not experience high inflation or high interest rates.
  • In contrast, the U.S., as a major consumer economy, tends to have higher inflation and interest rates, making its debt more attractive. Foreign investors, therefore, willingly buy U.S. debt because it often pays more than their own low-yield government bonds. This cycle allows the U.S. to sustain its trade deficit while keeping the global financial system running smoothly.

Economists remain divided on whether persistent trade deficits are problematic. Some argue that long-term imbalances between nations can create vulnerabilities, such as dependence on foreign financing. Others contend that trade deficits reflect structural differences in savings and investment patterns rather than an inherent economic weakness.

Bring Back Production Capabilities

Re-shoring industrial production, however, is not purely about trade balances. It has broader economic implications. Manufacturing and innovation are deeply interconnected—losing domestic production capabilities can weaken a country’s ability to develop and commercialize new technologies.

  • A strong manufacturing base supports industrial ecosystems, creating demand for high-skilled labor and fostering technological advancement.
  • Even basic manufacturing operations require advanced machinery and supply chains, which can stimulate domestic investment in innovation.

While the long-term impact of re-shoring remains uncertain, it is clear that the issue extends beyond trade deficits. The broader question is whether re-shoring strengthens the U.S. industrial ecosystem in a way that enhances innovation and economic resilience.

Engineering The Fiscal Imbalance

We could also see the ongoing fiscal shortfall in the U.S. as a tool by Republicans to create long-term pressure for cutting Social Security. This effort began with the 2017 Tax Cuts and Jobs Act, which significantly reduced federal tax revenues, increasing the deficit.

  • From 2020 to 2024, raising taxes became politically impossible for Democrats. Any attempt to reverse the tax cuts would have been framed as an economic burden on voters, effectively handing the next election to Republicans. As a result, fiscal revenues remained at a minimum, deepening the financial strain on government programs.
  • Now, with tax revenues constrained, Republicans have shifted their focus to spending cuts. After heavily publicizing cost-cutting measures, they will likely argue that all possible spending reductions have been made—except for Social Security. This sets the stage for a broader push to defund or restructure the program under the guise of fiscal responsibility.
  • In essence, this strategy moves toward a long-standing Republican goal of gradually dismantling Social Security by first engineering a fiscal crisis and then using it as justification for cuts.
  • However, if political conditions change, the U.S. could still raise taxes to stabilize its finances, given its strong economic base and global demand for the dollar.
  • European economies, on the other hand, face a much tougher challenge. Many already operate with high tax rates, making further increases politically and economically difficult. At the same time, their extensive welfare programs—ranging from universal healthcare to generous pension systems—are deeply entrenched and expensive.
  • Unlike the U.S., which can still adjust its fiscal strategy, many European nations have fewer levers to pull without triggering economic or social instability.

Ultimately, while both the U.S. and Europe face fiscal pressures, America’s ability to raise taxes in the future provides a degree of flexibility that most European countries simply do not have.

Where We Are Headed

For now, we remain cautious about prematurely reducing U.S.-based investments. The re-shoring strategy being pursued by the U.S. may not necessarily be bad for business. In fact, shifting production back home could strengthen domestic industry and reduce reliance on potentially unstable foreign partners.

  • China’s geopolitical posture has become increasingly concerning. The country has signaled its willingness to engage in “any type of war” and is widely believed to support and closely study Russia’s war in Ukraine.
  • This has raised alarms among global policymakers and businesses, making supply chain diversification a growing priority. As a result, moving production away from China and securing domestic supply chains may become the preferred strategy for many economies in the coming years.
  • In this context, the U.S. has a significant advantage. Its large, consumption-driven economy makes it relatively easier to transition toward domestic production.
  • However, the same cannot be said for Europe, which follows an export-led growth model. European economies are highly dependent on U.S. and Chinese consumption to sustain their industries. If global supply chains fragment, Europe faces a far greater challenge: it must not only re-arm and re-industrialize but also boost internal consumption to reduce reliance on external demand.

Benchmark's View

Still, fiscal folly in the United States should not be celebrated, and assuming it was all part of a strategy may be an overstatement. While the fiscal shortfall appears politically engineered, it is also the result of policy missteps and economic miscalculations.

  • Meanwhile, some European countries have maintained balanced budgets and still have room to expand their debt if necessary. This stands in contrast to the U.S., which aggressively accumulated debt during an economic expansion.
  • Now, with fiscal space already stretched, the U.S. faces limited options should a recession occur, making future stimulus efforts more challenging.
  • A balanced mix of European and U.S. investments may be the best approach to navigating the shifting economic landscape. While the U.S. retains greater fiscal flexibility, Europe's stricter policies provide a cushion to be used in hard times. Diversifying between both regions can help mitigate risks associated with either approach.

Additionally, hedging against a potential decline in the dollar could be a smart strategy. This allows investors to benefit from market strength while protecting themselves from currency fluctuations.

Disclaimer

Please note that Benchmark does not produce investment advice in any form. Our articles are not research reports and are not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Kyle Mills / Unsplash.