Making a famine where abundance lies

Written by Corrado Pistarino, chief investment officer, Foresters Friendly Society

07/04/2025

The US Administration’s intervention on tariffs has been framed as an attempt to address longstanding imbalances in global trade. For decades, no corrective mechanism has successfully reduced the US's dual role as absorber of global overproduction and borrower of last resort—providing unfettered access to its financial markets while issuing unlimited future claims on its economy via the Treasury market.

Re-shoring of manufacturing activity is presented as the long-term strategic aim. Yet a competing, more immediate goal—generating tariff revenue—complicates the narrative. After all, tariff receipts rely on the very global value chains that re-shoring ultimately seeks to dismantle.

The Administration’s simultaneous push for trade negotiations adds to the uncertainty, suggesting that current tariff measures may be more of a tactical bargaining tool than a permanent fixture. This openness to dialogue points to a still-evolving policy stance and hints at a future framework that has yet to be clearly defined. In the meantime, we can expect intensifying rhetoric as the US seeks to extract concessions from its trading partners. With midterm elections on the horizon, albeit a distant one, political urgency will grow. The Administration will be keen to ensure that any economic disruption from market volatility, reduced household spending power, or a slowdown in capital formation linked to the tariff regime is fully reversed by the end of 2025, giving time for a recovery to take hold ahead of the vote. This sets a de facto political deadline for resolving trade tensions and recalibrating key international relationships.

That said, this window could close sooner than expected. A sharper-than-anticipated deterioration in US economic conditions—especially if accompanied by market weakness that fails to trigger the usual safe-haven response in Treasuries—could force the Administration to reconsider its approach. Any such policy reversal would require careful political framing, but it remains a credible scenario. In my assessment, the probability of this outcome is at least 50%.

Viewed more broadly, the US is currently pursuing a suite of policies—on tariffs, immigration, and fiscal consolidation—that are collectively growth negative. In the short term, restrictions on immigration and higher tariffs are likely to push up core inflation while simultaneously weakening demand. This creates the risk of a stagflationary environment, putting the Federal Reserve in an increasingly difficult position. The risk of the US not entering a recession increases every day that the policy remains in place.

A likely version of the new global trade equilibrium would feature selective reconfiguration of value chains and differentiated trade terms with poorer countries. Strategic industries—typically high-value-added sectors—are expected to be the focus of re-shoring efforts, under the banner of resilience. Yet rebuilding these ecosystems will not be swift or smooth. It requires long-term investment, skilled labour, and redirection of capital from other productive uses. This shift risks near-term inefficiencies, duplication, and inflation—until and unless productivity gains are realised.

Compounding this challenge is the labour market: unemployment remains low, near 4.2%, raising difficult questions about where the manufacturing workforce would come from and whether it makes sense to shift labour away from higher-value roles. Manufacturing employment has been steadily declining since WWII, and reversing this trend will not be easy.

In lower-value-added sectors, meaningful re-shoring is unlikely. Here, consumers will absorb the cost increases while tariff revenues flow to the Treasury. This is, in essence, a one-off consumption tax—regressive in design and impact, disproportionately affecting lower-income households.

No amount of negotiation can undo a fundamental truth: the US is a rich country, and countries like Vietnam are not. Trade flows will continue to reflect that disparity. Higher tariffs may make Vietnamese goods less competitive, but they won’t eliminate the underlying demand—or the price U.S. consumers must pay.

For firms to commit to long-term re-shoring, tariffs must be perceived as permanent. Until the new framework is clearly defined and insulated from the electoral cycle, uncertainty will deter capital allocation. While this is growth-negative in the near term, clarity may eventually unlock an investment boom.

If tariffs come to be seen as a lasting fixture, they would signal not just a policy shift but a structural transformation of global trade—one that could rival a once-in-a-generation event in its scale and implications. Such a reconfiguration would touch every part of the global investment landscape. While risk assets are expected to come under further pressure, the more pressing challenge will be price discovery in a rapidly evolving and uncertain environment. Even once negotiations commence, ambiguity will likely persist. Equity markets are already adjusting, credit spreads are widening as investors reassess risk, and the Treasury market may prove less of a stabiliser than usual if rising inflation expectations and fiscal concerns outweigh its traditional safe-haven appeal. Together, these forces challenge the assumptions underpinning conventional asset allocation frameworks, including the long-favoured 60:40 portfolio model.

In this climate of heightened uncertainty, the case for diversification becomes even more compelling. Portfolios that are spread across geographies, currencies, and asset classes—especially those with meaningful allocations to private markets, where risk is more idiosyncratic and opportunities for structural diversification exist—are likely to fare better. Insurers with agile investment governance and the flexibility to respond swiftly to changing conditions may find selective opportunities. Still, caution remains essential. Market volatility, coupled with inconsistent policy signals, makes tactical positioning inherently risky. Even well-informed investment decisions are likely to be tested by abrupt market reversals and shifting narratives around policy objectives.

Finally, the role of the US dollar as a store of value and medium of exchange is coming under renewed scrutiny. Despite macroeconomic conditions that should support it, the recent depreciation of the dollar raises questions. Is this a temporary correction after Q4 2024’s rally, or does it reflect structural change sparked by the tariff regime?

In theory, the dollar’s strength reflects the long-term productivity advantage of the US economy. If re-shoring delivers substantial total factor productivity gains, that dynamic could hold. However, if productivity stagnates or inflation persists, the dollar could face greater pressure.

The dollar’s role as the global reserve currency is also being challenged geopolitically. The US decision to ban its digital dollar has opened the door for alternatives. China recently announced a cross-border RMB settlement system linking multiple Asian and Middle Eastern nations—representing around 40% of global trade—and bypassing the slower SWIFT network. In the long run, technology, rather than political pronouncements, will determine the architecture of global finance.

Still, absent another country willing and able to serve as borrower of last resort, the dollar’s dominance is unlikely to be seriously eroded. For now, it remains the cornerstone of global liquidity, even in a world reshaped by tariff walls and fractured supply chains.

*The views expressed in this content belong to the author and not their organisation.

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