Trump's trade war, version two
Overton’s Founder, Michael Martins, spent six years working for the US State Department, including all four years of President Trump’s first term in the White House. It is clear to us that Trump and his team are following the same playbook as in his first term, albeit with fewer guardrails in place. Our view is below
Our view:
Trump is using tariffs as a means to economically decouple from China and as a high-speed substitute for formal trade agreements. He has driven a deep economic wedge between the world’s two largest economies and will force traditional allies to pick sides. Concurrently, he secured immediate bilateral wins with countries like Israel, Taiwan, and Vietnam, who have pledged to reduce their tariffs toward the United States to zero.
A lack of strong pushback from his core political base (MAGA voters) indicates domestic support for Trump’s aggressive trade actions, regardless of its long-term economic cost. Many MAGA voters are also primary voters, and will add pressure to moderate Republicans in Congress facing primary challengers in 2026.
As in his first term, Trump is front-loading his big trade policy decisions. A renegotiation with Canada, Mexico, and potentially China is more likely than a reversal of the new 10% universal tariff
Traditional allies will increasingly treat Trump as a temporary disruptor in the global order, opting to delay structural realignment until after Trump leaves office, while flattering or ignoring Trump publicly.
Our wider view:
Trump rules MAGA land
Trump is king of MAGA land and most of the political squabbling, resignations, and firings that characterised Trump’s first term are absent this time because he spent four years surrounding himself with supporters and believers. This harmony will change as we progress through Trump’s first term and the race to succeed him accelerates. For now, however, many MAGA and Republican voters tend to take Trump’s word as gospel and adjust their views accordingly. For example, in March 2025, amidst the beginning of the trade war between Canada and the United States, only 44% of Republican voters viewed Canada as an ally, a twenty percent fall from before Trump’s second term began.
When Trump flexes his muscle, the world pays attention
Trump’s disruption of trade and economic doctrine has been surprising only in scale, not in intention. As we have been clear in public and private over the past two years, Trump is a longstanding supporter of tariffs, lopsided FTA negotiations, and graphs where the line moves upwards. With that in mind, his week of tariff policy changes have likely been a success in his mind and the minds of his supporters. His actions brought many third countries almost immediately to the negotiating table, where many have offered unfettered access to their domestic markets for American firms. The only tempering force seems to have been dramatic falls in the American stock market, which by the President’s own admission, may have scared voters. Nevertheless, Trump achieved his key aims, namely bullying of allies and adversarial countries alike while decoupling the US economy from China.
It’s a brave new (regional) world
Although Trump lowered the United States’ universal tariff from twenty percent to ten percent, the abruptness and volatility that marked his eventual climb down will do more damage to trade ties than the tax rate itself. In practice, the world is likely to continue to regionalise, where smaller markets orbit around or navigate between the three largest markets i.e. the US, the EU, and China. This is becoming increasingly clear in the European Union, which, after much delay, has finally started to speak about European defence spending and procurement in a more forward leaning manner following Russia’s invasion of Ukraine.
Next up: tax cuts
Following a similar playbook to his first term, Trump has erected a large economic wall around the US in the form of higher tariffs and policy uncertainty. Trump will now turn to pressuring Congress to pass his sweeping tax cuts and spending increases, or face the political backlash of not doing so at the 2026 midterms. Should Congress pass tax cuts at a similar scale to his first term, the US economy will grow, even as both its fiscal and trade deficits do as well.