Finding a theme for this article was remarkably easy. Global markets are facing a whirlwind of events, particularly in geopolitics. While I will leave the finer details of international diplomacy to the experts, the impact of these developments on markets is undeniable.
One need only look at the extraordinary rally in European defence stocks to see how geopolitical tensions shape market behaviour. Today, however, my focus is on tariffs, a long-standing economic tool that has once again taken centre stage, courtesy of US President Donald Trump.
At their core, tariffs are detrimental to stock markets because they distort the natural allocation of resources and disrupt global production efficiency. In an ideal economic landscape, capital flows to where it can be deployed most efficiently, ensuring lower production costs and higher-quality goods.
Tariffs, however, artificially inflate imported goods’ prices, forcing businesses to shift towards domestic production even when doing so is economically suboptimal. The consequence is increased business costs, higher consumer prices, and an overall drag on economic efficiency.
From a political standpoint, tariffs are an easy win. Protectionism resonates with large voter bases, particularly in industrial sectors that have suffered from globalisation. Steelworkers, automotive labour unions, and small-scale manufacturers often view tariffs as a lifeline despite the broader economic drawbacks. It is no surprise that Trump is doubling down on this strategy that resonates with the American working class and aligns with his ‘America First’ agenda.
Trump’s latest wave of tariffs aims to shield American industries and preserve domestic jobs. While this protectionist stance may appeal politically, the economic implications are more complex. In the immediate term, tariffs introduce inflationary pressures as businesses pass higher production costs onto consumers. This is precisely why equity markets react negatively to protectionist measures. Higher costs lead to margin compression, weaker earnings, and diminished long-term growth prospects.
The US is attempting to counterbalance these inflationary pressures with fiscal restraint. DOGE, the Department of Government Efficiency, seems to be drawing inspiration from Argentina’s recent economic playbook. After years of financial turmoil, Argentina has turned to fiscal tightening and achieved a budget surplus for the first time in over a decade.
Notably, this has not come at the expense of growth, as Argentina is on track for economic expansion this year. Whether the US can replicate this balance remains to be seen, but the policy direction suggests an attempt to curb inflationary effects and balance the budget.
One critical element that has yet to be addressed is retaliation. Tariffs rarely occur in isolation. Countries affected by protectionist policies typically respond with tariffs of their own. This escalation is precisely why tariffs tend to be a net negative for economic growth and, by extension, stock markets.
Any country facing US tariffs is highly likely to retaliate. This could mean higher levies on US tech exports, agricultural products, or industrial components. Other countries hit by tariffs are also reacting to safeguard their interests, reinforcing the cycle of trade restrictions that ultimately weakens global economic growth.
Although no formal tariffs have been announced on European companies, ongoing discussions and Trump’s push to reshape global trade suggest Europe will not remain unscathed. Potential levies on key industries such as automotive and industrial goods are a growing concern.
Europe is ramping up fiscal stimulus, partly driven by fears of a reduced US security commitment to NATO and Ukraine. Germany has announced major defence and infrastructure spending, while broader EU initiatives will inject further public investment into critical sectors. While this surge in expenditure may bolster economic growth, it is also likely to fuel inflation, adding pressure on central banks to tighten monetary policy.
Some US domestic producers, long undercut by cheaper imports, now find themselves in a stronger position. Tariffs act as a price equaliser, eroding the cost advantage of foreign competitors. This may boost revenues for US manufacturers, yet broader economic gains are far from certain, as retaliatory tariffs could weigh on American exports. Multinational corporations, which have thrived under free trade, face an increasingly uncertain outlook.
Global trade dynamics are shifting again, forcing businesses to rethink strategies and adapt to a new economic landscape. The evolving trade policies will introduce renewed uncertainty, making markets more susceptible to volatility.
Investors should brace for fluctuations as governments adjust their approaches and renegotiate trade relationships. The global economy functions best when capital and resources flow freely. Any disruption in the international trade balance introduces risks that must be carefully managed.
Gilbert Abela is an equity analyst at Curmi & Partners Ltd.
The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to con-stitute any advice or recommendation with respect to such financial instruments. Curmi & Partners Ltd is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.