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Dear Investor

General Market Overview


Much of the current market sentiment is being driven by geopolitics. The global trade landscape is undergoing a significant transformation as the United States (US), under President Donald Trump, implements a series of tariffs targeting key trading partners. Three primary factors drive these tariffs: (i) border security concerns, particularly with Canada, Colombia, and Mexico; (ii) geopolitical considerations, especially in the steel and aluminium sectors; and (iii) a push for fairness in trade practices, including reciprocal tariffs and addressing currency manipulation. China is the only nation that intersects with all three drivers, making it a central focus of the US trade strategy.


A stark imbalance marks the economic relationship between the US and China. The US accounts for 29% of global consumption but only 15% of global goods production. In contrast, China represents 12% of global consumption while producing 32% of the world’s goods. This disparity means that China’s share of global production is more than double that of the US, the second-largest producer. Deutsche Bank says this imbalance has created a $1 trillion trade deficit between the two nations.


Given the scale of this imbalance, the US-China trade war is expected to be protracted, far outlasting the duration of tariffs imposed on other trading partners such as Mexico, Canada, and the European Union (EU). The era of trade wars has undeniably begun, with significant implications for global markets.

President Trump has announced new tariffs of 25% on Canada and Mexico and 10% on China. These measures build on existing tariffs imposed on China during previous trade disputes. Approximately 40% of all US imports originate from China, Canada, and Mexico, with specific industries facing disproportionate impacts. For instance, the auto industry imports $80 billion worth of goods annually from Canada and Mexico, while $97 billion in crude oil is imported from Canada each year. Additionally, $55 billion in phones are imported from China, highlighting the interconnectedness of these trade relationships.

The US is uniquely positioned to leverage tariffs due to its relatively lower reliance on trade than its allies. Trade in goods and services accounts for less than 30% of the US Gross Domestic Product (GDP), while it represents approximately 85% of Germany’s GDP and 65% of the United Kingdom’s (UK) GDP. This disparity provides the US with a strategic advantage, as its economy is less vulnerable to the disruptions caused by trade restrictions.


The new tariffs are expected to have profound consequences for Canada and Mexico. While imports from these two countries account for only 14% and 15% of total US imports, respectively, they represent nearly 80% of both nations’ total exports. This lopsided trade relationship means that Canada and Mexico are far more dependent on the US market than vice versa, leaving them particularly vulnerable to the economic fallout from these tariffs.


Interestingly, China has significantly reduced its reliance on US trade since 2005. Today, Chinese exports to the US constitute just 15% of its total annual exports, accounting for only 15% of US imports. This shift suggests that China has diversified its trade relationships and may be better positioned to weather the impact of US tariffs than in previous years.


From a European and US perspective, one of the concerns often raised about Chinese manufacturing dominance is that the Chinese surplus in manufactured goods as a percentage of global GDP dwarfs that of the manufacturing “powerhouses” of the 1990s. The size of the trade surplus can be thought of simply as the difference between exports and imports. China is exporting far more manufactured goods than it imports. 

However, it must be noted that this is presented as a share of global GDP. While total Chinese exports in manufactured goods have increased 30 times from 1994 to 2023, the Chinese economy, as measured by GDP, has also grown 30 times during this period. The gap is insignificant if the trade surplus is viewed relative to domestic rather than global GDP. China dominates global manufacturing because it is the world’s dominant industrial economy. It’s not necessarily the case that China is punching above its weight; it is more of a case that “the rest of the world” hasn’t been able to compete.


Another key Asian market is Japan, which, unusually, has higher headline inflation than the US (4% versus 3% in the US). Japan is experiencing a temporary supply shock in rice prices, contributing to sharp rises in reported inflation. Unlike the rest of the developed world, which is struggling with elevated services inflation, the story in Japan is the exact opposite. Services inflation remains below 2% and ticked down. The sharp rise is coming from goods prices. Rice prices have surged 10% just in the last month.

The Bank of Japan (BoJ) has responded to these pressures by raising interest rates, with the short-term rate climbing from 0.25% to 0.5% in January 2025, arguably still at very low levels relative to other central banks.


The table below shows recent central bank decisions, and Japan is an outlier in terms of having hiked rates. While the Federal Reserve (the Fed) paused in January and held rates at 4.5%, there is no sense that the US is at the bottom of the interest rate cycle. Depending on economic data, more rate cuts by the Fed and other central banks may be imminent in 2025.

General Conclusion


The global landscape is shifting as international trade and monetary policy dynamics are poised to drive investment opportunities in the coming quarters. Geopolitical tensions, particularly the evolving trade landscape under President Trump's administration, have emerged as a primary market driver. The fundamental economic imbalance between the US and China underpins this trade conflict. The US possesses a strategic advantage in this trade environment; meanwhile, Canada and Mexico face particular vulnerability.


Monitoring the perception of market risk sentiment will be an important tool in positioning investments correctly for structural changes in trade flows, interest rate moves from central banks, and global economic growth. 

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