US Tariffs/Debt: A growing economic headache...
President Trump’s tariff policies remain a source of ongoing uncertainty. In the past two weeks alone, he announced a 25% tariff on smartphones and threatened a 50% tariff on European goods starting in June - only to delay implementation to July 9. Meanwhile, the US International Trade Court ruled the “Liberation Day” and Fentanyl tariffs on China, Canada, and Mexico illegal. While the Trump Administration has appealed, keeping the tariffs in place for now, it is also exploring alternative legal grounds to sustain them should the appeal fail. In a further escalation, Trump declared that tariffs on steel and aluminium will double to 50%.
This back-and-forth has driven a rollercoaster in US tariffs - rising from an average of 2.7% at the year's start to over 30% post-Liberation Day, now falling to around 14%, with potential to drop to 6 - 7% if the Trade Court’s ruling holds. Yet, further volatility is likely if Trump wins the appeal, deploys new legal justifications, or trade talks - especially with China and Europe, collapse.
Efforts to make sense of the ultimate trajectory and economic impact of these tariffs are hampered by policy volatility. This has led to the nickname “TACO” (“Trump Always Chickens Out”), which Trump has dismissed as part of his negotiating style - “set a ridiculously high number, then lower it slightly.” However, this perceived retreating behaviour has diminished the market's reaction to tariff news. Ironically, this same resilience, combined with Trump's frustration over the TACO label and court setbacks, may provoke him to escalate measures, evident in the doubling of steel and aluminium tariffs. With several key deadlines looming (July 9 and August 12 for China), resolution seems distant. Meanwhile, another economic storm cloud is brewing: concerns over rising US public debt and its impact on bond yields.
Why are US debt worries flaring up?
Although debt fears are nothing new, their focus has shifted post-GFC from private to public debt. The US debt clock, launched in 1989, and S&P’s 2011 downgrade of the US from AAA to AA+ briefly reignited concerns. However, these were mitigated by falling bond yields, which made rising debt manageable.
That may be changing. Recent developments include:
Bond yields rising since the pandemic, pushing interest payments to 18% of federal tax revenue.
The One Big Beautiful Bill Act (OBBBA) - a $3 trillion extension of Trump’s 2017 tax cuts.
Moody’s downgrade of the US credit rating to Aa1.
Eroding investor confidence due to chaotic tariff policy, Fed interference, regulatory attacks, and Section 899 of the OBBBA (a tax on foreign investors), challenging the idea of “US exceptionalism.”
Official projections show deficits around 7% of GDP - well above the 3% needed to stabilise debt. Gross federal debt could surge from 124% to 155% of GDP by 2035. Despite tariff revenues and minor spending cuts, they can’t fully offset the tax cuts. Rising interest costs will likely hit new records.
A gloomy outlook, but not hopeless...
While the US faces significant challenges, it's not in Argentina's position. Key mitigants include:
The US borrows in its own currency - eliminating the risk of a currency-driven debt crisis.
US debt is high but lower than Japan, Italy, and France - countries that are muddling through.
Supply-side policies could spur growth (though countered by tariffs, lower immigration, and funding cuts).
The US can still raise taxes or, in crisis, call on the Fed to purchase bonds.
Still, deteriorating fiscal outlooks combined with erratic policies could prompt global investors to demand higher premiums to hold US assets. While US tech and AI strength may cushion the impact for now, this scenario suggests persistent volatility.
Implications for Australia...
Australia’s relatively low public debt is a strength.
Rising US yields may not spill over if Australia is viewed as a safer investment.
Tariff/debt-related US market downturns will affect Australian shares, but potentially less so.
If the USD loses its safe-haven status, the AUD may not drop as much in a crisis - shifting more responsibility to the RBA for economic stabilisation.
Conclusion...
Markets are near record highs, buoyed by investor optimism, the ‘TACO’ effect, and strong technicals. However, tariff uncertainty and rising debt risks could trigger fresh volatility through the seasonally weak September period. A consistent, market-friendly pivot from Trump would help - but seems unlikely soon.
Enjoy your weekend!
Rick Maggi, Fzinancial Advisor Perth, Westmount Financial
Disclaimer
This document has been carefully prepared by Westmount Securities Pty Ltd (ABN 42 090 595 289, AFSL 225715) for general information purposes only. However, neither Westmount Securities Pty Ltd nor any of its affiliates guarantee the accuracy or completeness of any statements contained herein, including any forecasts. It is important to note that past performance is not a reliable indicator of future outcomes. This material does not consider the specific objectives, financial circumstances, or needs of any particular investor. Therefore, before making any investment decisions, investors should assess the relevance of this information to their individual situation and consult professional advice, taking into account their unique objectives, financial position, and needs.