Ozde AykurtUS President Donald Trump’s trade war unsettled global markets and revealed a resilience in China’s economy that American officials had underestimated.
As Trump joins fellow leaders at the 51st G7 summit in Canada, tensions are high, not just over Iran’s recent retaliation against Israel. A looming wave of tariffs, set to take effect on July 9, is fuelling concern among dozens of countries, some of them seated at the summit table.
Ahead of the summit, the rare earths deal finalised by the US and China in London has intensified pressure on Japan and the European Union to either strike similar trade deals or face punitive tariffs.
China holds a steadier and strategic leverage of a geopolitical card. It controls about two-thirds of the global supply of rare earth minerals, and roughly 90% of processing capacity. The said minerals are crucial for electric vehicles, wind turbines, smartphones, and advanced military systems.
America, by contrast, is more erratic. Its economic signals shift from week to week, and its trade posture remains reactive and uncertain. Tensions are expected to run high, especially after Trump famously stormed out of the 2018 G7 meeting. This year, too, he returns without a coherent strategy. And as of writing this report, news of him “exiting” the summit is splashed across the headlines.
Tariffonomics: risk vs uncertainty
Trump campaigned on being tough on China, only to backtrack, double down days later, and then reverse course again. One week he’s targeting Canada, the next it’s the EU.
He may be leaning into a “madman theory” approach, perhaps believing unpredictability gives him leverage in negotiations while he seemingly enjoys watching cabinet officials scramble to keep up.
But global markets don’t reward unpredictability. They punish it.
In finance, risk and uncertainty are not the same. Investors can manage risk—they assess it, price it, and demand returns accordingly. Think of it this way: risk is like knowing there’s a 60% chance of rain. You can prepare: bring an umbrella or stay home. Uncertainty, on the other hand, is not knowing if it’ll rain, snow, or if the sun will disappear. You can’t plan for that. It throws everything off.
Following Trump’s tariff announcements, the S&P 500 dropped sharply and has yet to return to pre-announcement levels, despite multiple walk-backs and “pauses.” Bloomberg’s Billionaires Index recorded its worst two-day drop ever. Jeff Bezos, Elon Musk, and Mark Zuckerberg each lost over $23 billion in a matter of hours.
You might ask, “Why should the average American care if billionaires lose money?” Because much of that wealth is tied up in stock prices. When valuations drop, companies have a harder time raising capital. These paper losses directly affect their ability to grow, hire, and invest.
The impact goes beyond equity markets. The dollar has taken a hit—falling to its lowest level since 2023. That adds another layer of unpredictability for global businesses navigating import costs, trade balances, and inflation exposure. A weaker dollar may help exporters in theory—but not when every other policy variable is in flux.
Meanwhile, there’s an intriguing trend emerging in consumer behaviour: Personal incomes in the US are rising—up 0.8% in April following a 0.7% increase in March, but inflation is falling.
Typically, this would spur more spending. Instead, people are choosing to save more. The savings rate jumped from 4.1% in January to 4.9%. If this were just about having more money left over, GDP wouldn't have shrunk by 0.2% in the first quarter. So, what's happening?
It appears people are feeling uncertain about the future, leading them to cut back on spending, even with the looming threat of tariffs driving prices higher in the future. Case in point: Nike has already raised prices in the US, a sign of what's to come.
On the producer side, things are even more troubling. Stimulating consumer spending is relatively easy. But getting businesses to invest? That’s much harder.
Trump’s erratic tariff strategy has introduced a level of unpredictability not seen in decades. Trade policy uncertainty is now at record highs—exceeding levels during the COVID-19 crisis—and bleeding into broader economic policy concerns. Who wants to invest in that kind of environment?
The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index (PMI), a key indicator of manufacturing health, has shown signs of contraction during heightened trade disputes. For instance, in April 2025, the PMI registered 48.7%. Anything below the 50% threshold suggests declining business confidence.
When businesses are unsure about future tax rates, regulations, or market access, they become hesitant to invest in new equipment, facilities, or R&D. The “option value of waiting” increases, making it more rational to delay irreversible investments until there’s more clarity.
Nowhere is this more visible than in the auto sector. Trump’s tariffs in April briefly incentivised building cars domestically. But when the rules suddenly changed again in May, extending tariffs to auto parts, the incentives vanished.
When businesses delay investment, growth stalls, and so does job creation. The Penn Wharton Budget Model projects that tariffs, especially when rolled out unpredictably, could reduce long-run GDP by about 6% and wages by 5%. This weakens the US negotiating position.
Meanwhile, Beijing has considerable power over global supply chains given the dominance it has built through decades of strategic policy, and an upper hand on rare earth minerals.
As negotiations continue, one thing is clear: volatility may win headlines, but strategy wins leverage.
