Wednesday, 19 February 2025
Written by MYTHEO
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Key Takeaways
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The US holds an upper hand over most of its trading partners because of its large trade deficit. As a service-driven economy, its reliance on global trade is relatively small, meaning it will be less impacted by a trade war.
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So far, Trump has taken a calculated approach, carefully balancing protectionism with economic stability. His strategy aims to shield the US economy from the consequences of its own trade war while securing better trade terms.
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With strategic exposure to the US market and inflation-hedged assets, MYTHEO offers a "beautiful" strategy to navigate potential trade war escalations, providing investors with both resilience and opportunity in uncertain times.

"Trump’s Trade War: A “Beautiful” Strategy or Economic Pitfall? Unveiling MYTHEO's Strategic Edge for Investors"
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Trump has often said that “tariffs” is the most beautiful word in the dictionary. But why does he love tariffs so much?
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A tariff is a form of tax imposed by one country on imported goods and services to influence trade, generate revenue, or protect domestic industries. Many nations use tariffs to shield strategic industries by making foreign competitors’ products more expensive. For instance, Malaysia imposes tariffs on imported vehicles to support its domestic car industry.

However, Trump has taken a different approach by pushing for broad-based tariffs—meaning nearly all goods imported from targeted countries would be taxed. He has also sought to impose tariffs on multiple nations, not just one. This is why one of the biggest concerns about Trump returning to the White House is his aggressive tariff stance. While tariffs may be “beautiful” to Trump, they are far less appealing to other countries.
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As a strategic tool in global trade, tariffs benefit the US more than most other nations for two key reasons.

• The US Has More to Gain Than to Lose in a Trade War. In 2024, US exports were valued at $2.07 trillion, while imports stood at $3.27 trillion—a staggering $1.2 trillion trade deficit, according to US Census data. This means the US holds the upper hand against most of its trading partners even if a trade war were to start. The US has much to gain and almost little to lose

• The US economy is predominantly driven by services, making it less dependent on global trade compared to manufacturing-heavy nations. While trade disruptions hurt all economies, the US is among the least vulnerable because its trade to GDP ratio is only 25%. By contrast, on average, global trade accounts for 67% of world GDP, and Malaysia is one of the economies deeply tied to trade—trade activity is 132% times the size of its GDP—are at greater risk.

When Trump took office on January 20, he quickly escalated trade tensions by announcing a wave of tariffs targeting key trading partners. He linked tariffs to immigration disputes with Canada, Mexico, and Colombia while also threatening all BRICS nations with a 100% tariff if they attempted to replace the US dollar as the global reserve currency. To address the long-standing trade deficit with China, he imposed a 10% tariff on Chinese imports.

A brief dispute with Colombia underscored the complexities of Trump’s tariff strategy. When Colombia blocked US deportation flights, he swiftly imposed a 25% tariff on all Colombian goods, along with a travel ban, visa restrictions, and financial sanctions on Colombian officials, their families, and supporters. However, these measures were not the end goal but rather a negotiating tactic. Once an agreement was reached, the sanctions were lifted, and tariffs on Colombian goods were removed.

‍A similar pattern emerged with Canada and Mexico. On February 1, 2025, Trump imposed sweeping tariffs on both countries’ imports, threatening further increases if they retaliated. Canada responded with equivalent tariffs, while Mexico announced plans to retaliate but did not specify details. In response, Trump de-escalated, postponing the tariffs for a month—signaling once again that his tariff threats primarily serve as leverage in negotiations. The 25% tariffs on Canada and Mexico represent a worst-case scenario, and as seen with Colombia, they could ultimately be lowered or withdrawn. This strategy is likely to be repeated with European nations and BRICS members.

On China, Trump imposed a 10% tariff on all Chinese goods—far less severe than the 60% tariff he had previously threatened before returning to the White House.

Despite his bold rhetoric, Trump understands that tariffs are a double-edged sword. While they can serve US interests, they also invite retaliation. In a deeply interconnected global economy, any US-imposed tariffs will likely trigger countermeasures, creating risks even for the world’s largest economy.

We see a trade war as the biggest risk to the market this year. An all-out trade conflict could disrupt key industries, raise costs for American businesses, and unsettle financial markets. However, based on recent actions, Trump appears to be taking a more calculated and strategic approach to avoid massive disruptions to the US economy. For this reason, we believe President Trump will not take a major gamble on global trade but will aim to strike a balance between protectionism and economic stability. His recent dealings with Colombia, Canada, and Mexico suggest that, despite his tough stance, he ultimately favors negotiation over outright confrontation.

From a portfolio perspective, MYTHEO's holdings are heavily weighted toward the US market. As of the end of January 2025, over 63% of the growth portfolio and 78.2% of the income portfolio are exposed to US assets. The Inflation Hedge portfolio primarily invests in assets correlated with inflation, such as commodities, real estate, precious metals, and inflation-linked bonds. Due to its lower reliance on global trade, the US market is expected to be more resilient should trade tensions escalate. A key consequence of such escalation is inflation, as tariffs increase the cost of goods for businesses and consumers. The MYTHEO’s Inflation Hedge portfolio is specifically designed to address this risk.

Therefore, the combination of a portfolio highly weighted in the US market and inflation-hedging assets is ideal for navigating a trade war. Therefore, MYTHEO's investment strategy may be the most "beautiful" strategy to navigate a trade war.

This material is subject to MYTHEO’s Notice and Disclaimer.