INSIGHTS | May 2025

Understanding the Tariff War and Navigating a Changing Geopolitical World Order

What’s driving the U.S. tariff strategy? How are capital markets responding? And what does it all mean for global supply chains and investor positioning?

Florian Schweitzer:Let's start with the basics. From your vantage point in capital markets, what are the underlying reasons and motivations behind the U.S. intensifying its tariff stance in recent years?

Dr. Philip Schnedler:Significant global imbalances have built up in recent decades. Large parts of the world, especially China but also Europe, have produced more goods than they have consumed and exported their excess production to the US. In return, they have received US dollars, mainly in the form of US debt. The US, in turn, has consumed more than it has produced in recent decades, running up huge trade deficits that it has financed mainly with debt, which Chinese and European investors were happy to buy. These imbalances are problematic for two main reasons: i) US government debt has risen steadily over the past sixty years and is now even higher than after the Second World War at over 120% of GDP. In the 1980s it was just over 30%. US government debt has thus reached a critical level that cannot continue to rise at the same pace as in recent years. ii) The large US trade deficit has also made the US highly dependent on its trading partners. This is not a problem as long as countries do not see each other as competitors or enemies. However, the necessary trust between the US and China has steadily eroded in recent years. The US increasingly sees China as its key rival. For the US, it is therefore increasingly a matter of national security and sovereignty not to be dependent on China for important goods and raw materials. Self-sufficiency is becoming increasingly important. After all, who can guarantee that the other country will continue to supply you in the event of a real conflict? The scale of the global shift that has taken place in world trade in recent decades is enormous. Just 30 years ago, the US was the world's undisputed leader in global manufacturing. Its share of global manufacturing was around 24%. Today, its share is only 15%. Over the same period, China's share has risen from less than 5% in 1995 to 32% today. In just 30 years, China has become the world's number one manufacturer, more than twice the size of the US.

Florian Schweitzer:How are capital markets interpreting these moves—do investors see them as necessary protectionism, a political play, or a long-term structural shift?

Dr. Philip Schnedler:Many investors see the tariffs announced by the Trump administration as a short-term tactical manoeuvre to negotiate better trade deals and assume that they will soon be withdrawn. However, this overlooks the fact that the tariffs are not coming out of the blue, but are being introduced to address the global imbalances described above, which could otherwise soon reach a critical tipping point. In a deglobalising world, the trade deficits and capital imbalances described above will have to shrink one way or another. I think we are seeing a movement in the global world order from free-trade globalisation to modern mercantilism. The key idea of modern mercantilism is that a country should maximise its economic power and national wealth by maintaining a positive balance of trade - often through state intervention in the economy. In essence, modern mercantilism combines economic policy with geopolitics, aiming to promote self-sufficiency in key areas such as technology, energy, defence, food and raw materials. China is a prime example of modern mercantilism. After decades of state-sponsored technological advancement and production-side stimulus in strategic industries, China has become a strong competitor in a wide range of advanced products and sectors, such as electric cars, renewable energy, electrical appliances, not to mention fields such as robotics, artificial intelligence or rare earth materials.

Florian Schweitzer:In times of tariff escalation, what is the economic impact and how does it affect companies with significant global supply chains or export exposure?

Dr. Philip Schnedler:Geopolitical uncertainty increases in a mercantilist world order. At the same time, the positive wealth effects of free-trade and global, efficient value chains are reduced. Higher tariffs are stagflationary for the world as a whole, more deflationary for the country being hit by tariffs (e.g. China) and more inflationary for the importing country imposing the tariffs (e.g. the US). At the company level, investors will look more closely at where companies' supply chains are located and where they sell their products and goods. Companies that have a high degree of congruence between their manufacturing footprint and their sales footprint will naturally be well positioned. In other words, companies that primarily manufacture their products where they also sell them. Conversely, companies that have moved a large proportion of their global manufacturing capacity to China could be at a significant disadvantage. Apple, for example, still makes around 90% of its iPhones in China. What has been seen as an advantage in recent years due to efficient and low-cost production can become a major disadvantage in a changed world of high tariffs. Bringing advanced, complex manufacturing back to the US is very costly, will take a long time and will be more expensive simply because of higher wages in the US.

Florian Schweitzer:Are we seeing any emerging asset classes or investments that are gaining popularity among investors as a hedge against tariff-driven volatility?

Dr. Philip Schnedler:In a world of trade conflicts, there will be winners and losers. As a result, the regional weighting of countries and regions will certainly become more important in the future. Experience from past trade conflicts shows that neutral countries tend to fare relatively better than those at the centre of the trade conflict. These countries may even have an opportunity to negotiate better trade deals for themselves in the wake of the major conflict between the world's two largest economies, the US and China. It is therefore important to keep a close eye on the behaviour of countries or regions such as Europe, India, Mexico, Brazil, Vietnam, South Korea and Japan. This applies not only to equity and bond allocations, but also to currency exposures. At the sector and company level, investors should certainly favour investments that are not burdened by higher tariffs, and may even benefit from higher tariffs on competitors or foreign suppliers. I would also mention gold and certain commodities. Gold will remain an attractive storehold of value in the future, given the enormous government debt of many Western countries and the risk of monetized deficit spending, as well as the high level of geopolitical uncertainty.

Florian Schweitzer:Do you believe this tariff environment is here to stay? If so, what opportunities do you see in Europe in the coming 3–5 years?

Dr. Philip Schnedler:There will certainly be new trade agreements between the US and other Western or neutral countries or regions such as Europe, Japan, Canada, Mexico and India in the coming months. In my view, the current tariffs of over 100% between the US and China will not remain, but the rivalry between these two powers will continue to increase, which will be reflected in higher tariffs overall. This is not a new development, but it began during Trump's first term in office. Back then, Trump raised tariffs on imports from China from around 3% to over 10% on average. As a result, China's share of US imports has already fallen significantly in recent years, from 21% in 2016 to 13% last year. So the so-called decoupling between the US and China has been taking place for several years. I expect this trend to continue at an accelerated pace during Trump's second term. Investors should be prepared for more than just tariffs. Tighter export and investment restrictions, capital controls, military sanctions and other measures could follow.

There are some interesting opportunities in Europe over the next few years. Especially if Europe plays it smart in the trade war between the US and China, for example by trying to stay neutral and even using the opportunity to negotiate better trade deals with other parts of the world. In Europe, there are also positive growth impulses from the lifting of the debt brake in Germany and the resulting EUR 1 trillion fiscal programme to invest in defence and infrastructure. This is equivalent to around 25% of German GDP, which is a significant boost to growth, even if it is spread over five to ten years. There are therefore attractive investment opportunities in defence, infrastructure and energy, but also in areas that will benefit from the reshoring of key industries and manufacturing back to Europe, such as automation, robotics and industrial AI. Demographic change and a shrinking workforce in Europe are also major challenges. This is particularly acute in the health and care sectors. Attractive investment opportunities are also emerging here.