Trump Is Successfully Corralling Countries To Join Trade War Against China

By Benjamin Picton, senior market strategist at Rabobank

Central Banks and State Visits

The week ahead is shaping up as somewhat of a watershed for markets as the FOMC looks poised to deliver the first rate cut of the second Trump presidency. 85 of 93 analysts surveyed by Bloomberg are predicting a 25bp cut (including RaboResearch), with 6 forecasting no change and 2 plumping for an extra-large 50bp cut.

OIS futures are convinced that a cut of at least 25bps is a done deal, despite core PCE and CPI sitting well above the Fed’s 2% target at 2.9% and 3.1% respectively. A delta of 26.1bps is currently priced in to the implied Fed Funds rate following a dovish pivot from Jerome Powell at Jackson Hole, two consecutive months of dreadful jobs figures (which the FT is today laying at the feet of Trump’s tariffs) and some even more dreadful revising-away of previously reported employment gains that appear to have been – in part – magicked-up by the BLS’s Birth-Death model.

Regular readers will recall that Trump – unhappy with the swings in reported employment levels – sensationally fired BLS head Erika McEntarfer after the July payrolls report disclosed a huge 258,000 downward revision to reported employment gains in May and June.

The intrigue of this week’s FOMC meeting will be heightened by the Senate confirmation hearing of Trump acolyte Stephen Miran that is scheduled to take place later today. The administration is pushing to have Miran confirmed as replacement for Adriana Kugler – who recently stepped down from her position as a Fed Governor – before the FOMC meeting begins tomorrow. There’s little doubt that Miran would join July dissenters Bowman and Waller in pushing for a rate cut (maybe even a 50bp cut?) if his appointment is confirmed later today. President Trump certainly seems to think so, he told reporters on Sunday that he is expecting a “big cut” from the FOMC this week.

Separately, President Trump renewed a request on Sunday for a Federal appeals court to allow him to fire Fed Governor Lisa Cook prior to this week’s FOMC meeting. Bloomberg Economics lists Cook amongst the most dovish Fed Governors on its spectrometer, which seems to run counter to the idea that Trump wants to stack the FOMC with doves. Could it be that the President is convinced that Fed Governors’ determinations of the appropriateness of monetary policy are not a purely technocratic process and actually exhibit some malleability dependent on who happens to be occupying the White House? See here for our full preview of this week’s FOMC meeting.

The Fed is not the only central bank in action this week. The Bank of Canada, Bank of England, Norges Bank, Bank of Japan and Brazil Central Bank will all be meeting to set policy rates. Of those listed, the BOC and Norges Bank are expected to deliver 25bp cuts, while the BOJ, BOE and BCB keep rates unchanged.

The Bank of Canada finds itself in a similar position to the Fed, whereby the course of its monetary policy is being dictated by a rapidly deteriorating labour market even as inflation pressures remain uncomfortably elevated. As Molly Schwartz and Christian Lawrence point out here, the Canadian economy is being buffeted by tariff shocks through the trade channel which were not helped by the economic nationalism adopted by former PM Trudeau while he had one foot out the door earlier this year. Increasingly, Mark Carney seems to be walking back Trudeau’s hairy-chested approach in favour of a more “go along to get along” strategy with Canada’s Southern Neighbor.

Carney’s slow motion fold on the tariff fight is interesting in the context of Donald Trump’s suggestions late last week that NATO allies should place tariffs of 50-100% on China and India as secondary sanctions for their continued purchases of Russian energy. Uncomfortably, the EU also continues to purchase Russian energy and no leaders of NATO countries have seen fit to endorse Trump’s plan.

However, it might be worth remembering that it was only a short while ago that the 5% spending target demanded of NATO allies by the USA was seen as a non-starter and impossible under current fiscal constraints – until it wasn’t. It was similarly assumed that the EU would not sign on to a one-sided trade agreement with the United States – until it did, and South Korea wasn’t going to agree to 3.5% defence spending – until it did. Are we seeing a pattern here?

Trump has been transparent in his efforts to corral allies into supporting his strategy of isolating China economically and geopolitically, though many media outlets remain oblivious to the broader strategy and continue to see only chaos.

Canada got in ahead of time to impose tariffs of 100% on Chinese EVs and 25% on Chinese steel and aluminum, while Mexico – ahead of USMCA renegotiations slated for next year – has announced tariffs of up to 50% on cars and other products made in China and Asian economies suspected of acting as intermediaries for Chinese transshipment. The EU imposed tariffs of up to 35% on Chinese EVs in October last year, and South Korea has placed duties of 38% on Chinese steel plate and 21% on stainless steel while also making commitments to lend its expertise (and capital) to help revive US shipbuilding. Trump’s demands are prodding allies further down a protectionist path that they are already on toward common tariffs against China.

For further signs of Western leaders crabwalking towards the US’ policy demands, look no further than Australia. Having spent months pushing back on suggestions that Australia would be forced to increase defence spending in line with US demands, PM Albanese recently announced an A$1.7bn investment in a new fleet of AI-equipped undersea lethal drones to be built by US arms manufacturer Anduril. Shortly afterwards, Albanese announced a A$12bn “downpayment” to expand shipbuilding and maintenance facilities in Western Australia where US Virginia class and UK Astute class nuclear submarines will be rotationally-based and undergo sustainment under the terms of the AUKUS agreement (even as a Chinese defence industry study says that AI could make it “nearly impossible” for submarines to survive in future naval combat), thereby reducing capacity pressures on the US’ own shipbuilding and maintenance facilities. Again, are we sensing a trend here?

Trump himself will make a state visit to the UK from Tuesday this week with NVIDIA’s Jensen Huang and OpenAI’s Sam Altman in tow. The FT reports that PM Starmer is today set to announce a new US-UK agreement on nuclear energy, which apparently includes an agreement between the UK’s Centrica and US’ X-Energy to build advanced modular reactors in Hartlepool, England. Other deals covering tech, AI and Scotch whiskey are also likely to be announced.

Of course, energy is an input to all production and the immense electricity consumption of AI-enabling data centres requires abundant affordable energy to be viable. While reporting on the nuclear energy partnership the FT concurrently bemoans that “the West is buried under red tape” as risk-shy bureaucrats ladle on regulation and complexity, thereby killing competition, innovation and productivity of the kind that will be needed to realise the ‘affordable’ part of ‘abundant, affordable energy’. Trump’s trade tariffs and the various national responses to them are pointed to as another source of complexity that Western business has to deal with.

Perhaps a common external tariff would simplify things?