The shifting geopolitics of Trump’s tariffs

0:02Good morning from the Financial Times. Today is Thursday, April 2nd, and this is your FT News Briefing. President Trump gave the U.S. an update on the war in Iran, and Chinese bonds seem to have become a safe haven from the war. Plus, the FT's Gideon Rachman explains how U.S. tariffs have reshaped geopolitics. These are efforts to not only preserve but actually expand the network of free trade deals, but in a way that basically goes around the United States. I'm Sonia Hudson, and here's the news you need to start your day.

0:49U.S. President Donald Trump addressed the nation last night and tried to reassure Americans that the war in Iran was nearly over. He said his core strategic objectives are almost complete. Their Navy is gone. Their Air Force is gone. Their missiles are just about used up or beaten. taken together these actions will cripple Iran military, crush their ability to support terrorist proxies and deny them the ability to build a nuclear bomb. Trump threatened to hit Iran hard in the next two to three weeks. He warned that the U.S. would strike the country's power plants if no deal is reached with Tehran in that time.

1:29The president also called on other countries to protect oil going through the critical Strait of Hormuz. Iran has effectively closed it by attacking ships passing through. The waterways closure has led the cost of oil to spike, and that's caused a jump in gas prices at the pump. During last night's address, Trump tried to soothe concerns about those costs, which could be a political liability for his party going into the midterms. When this conflict is over, the strait will open up naturally. It'll just open up naturally. They're going to want to be able to sell oil because that's all they have to try and rebuild.

2:09It will resume the flowing and the gas prices will rapidly come back down. Stock prices will rapidly go back up. The price of Brent crude jumped after the president's speech.

2:28Chinese government bonds have sidestepped a global debt sell-off since the start of the Iran war. The world's second biggest economy is emerging as a haven from soaring energy prices and rising global inflation. I'm joined by the FT's William Sandlund to talk more about this. Hi, William. Hi there. So can you explain why China's debt seems to have avoided the damage suffered by other sovereign bonds around the world? Sure. So the first thing is that going into this conflict, China was unique globally for having a deflation problem rather than any kind of lingering inflation from the pandemic. And then the reason this sort of energy shock of higher oil and gas prices isn't as severe for China is the country has a more diversified energy mix.

3:17So it has a lot of coal and a lot of renewables than, say, the United States is where you have more EVs, you have more electricity being used in manufacturing. So you have less direct exposure to higher energy prices. And the other big factor is they have an enormous strategic petroleum reserve and access to discounted Russian oil and natural gas. So they're in this position where they're just better able to weather the shock of higher energy prices than most other major economies in the world. And can you explain for folks how those economic circumstances are influencing how investors view Chinese government bonds?

3:57Normally in a risk-off kind of environment when there's a lot of uncertainty, you see U.S. treasuries being that haven asset of choice. The fact that Chinese government bonds have been getting this much kind of investor attention is significant because it's acting the way you would expect a haven asset to work during a period of uncertainty. and it's offering for an investor an uncorrelated return, meaning that this is an asset that is behaving differently than other global bonds, than global stock markets and commodity prices. So it's offering a really interesting, compelling, some would say, means to diversify your portfolio.

4:43What about global investors in particular? How are they thinking about this? Well, most of the owners of Chinese government bonds are in China. So there are some global investors who own these and they are in the single digits percentage wise. So there's just not a huge amount of ownership. That's also part of why these bonds are behaving differently is because there are capital controls in China, which mean that investors in China can't put their money outside of the country easily. And so they have a very limited pool of options to put their capital during periods of uncertainty. But for foreign investors, for those who are willing to go through the steps necessary to own Chinese government bonds, this has been a very useful way to kind of reduce volatility and offer uncorrelated returns.

5:34So William, is there anything that could change how investors are viewing these Chinese bonds or how these bonds are behaving? The biggest thing is if we see an increase in the holding of these bonds as a reserve asset in the coming months or years, the renminbi's share of global reserve assets is very low. So if there's any indication that that's starting to shift, that would be significant. Now, the biggest hurdle to that is that China continues to have the capital controls that make it harder to put money into the country and also to take money out of the country. for foreign investors, that may need to change more for there to be a meaningful increase in the foreign holdings of Chinese government bonds as a reserve asset.

6:21William Sandland is the FT's Asia Markets Correspondent. Thanks, William. Thanks so much.

6:33Exactly one year ago today, U.S. President Donald Trump made a tariff announcement that sent shockwaves throughout the world. It was a profound wake-up call for countries that had considered themselves staunch U.S. allies over many decades. News briefing host Mark Filippino talked to the FT's chief foreign affairs commentator Gideon Rockman for the fourth installment in our tariff series. They looked at the impact of these tariffs one year on and how they've affected America's relations with the rest of the world. Here's Mark and Gideon. So Gideon, how did America's allies initially respond to the tariff announcement a year ago?

7:13I think they were pretty appalled. I mean, for numbers of reasons. The first is that they did not expect to be treated like this by, you know, their closest ally or their sponsor of the kind of Western alliance. Second, it sort of ran counter to decades of economic orthodoxy that tariffs are counterproductive, that in the end they don't work well for anyone. And I think that also, obviously, there were direct worries about their own economy. So generally, they were very unhappy about it. But they mostly decided that it would be counterproductive to hit back. Now, obviously, there were some winners and losers out of this.

7:49Who, in your view, came out best from the protracted trade negotiations that followed and which countries were hit hardest? Well, it was a slightly moving target because Trump is very capricious on these tariffs so that he can give you a good deal and then decide that you've annoyed him in some ways. and then suddenly impose new tariffs. And he often makes threats that he doesn't carry through on. Initially, the British were quite pleased because they were the first to negotiate a bilateral deal. And they got a base tariff of 10%, which was better than the EU, which got 15%. But I think largely because of the Ukraine war and the need for American support there, the EU decided to swallow it and they took 15%.

8:28Then some of America's Asian allies, Taiwan, initially got 20%. The Japanese also got hit not just with high tariffs, but also had to make these slightly fantastical pledges to invest billions and billions of dollars in the United States. But it was generally assumed that however badly America's allies did, China would always do a bit worse or maybe a lot worse. However, the Chinese then discovered that they were able to use the threat of withholding rare earths from American industry and Western industry in general as an extremely effective counterblast to the U.S. and that forced Trump to pull back a bit.

9:03I think you make a really salient point about the fact that these tariffs weren't always rooted in economics. For example, India and Brazil were among the hardest hit countries because of the relationship that they had with the U.S. or the personal vendetta that Donald Trump had against these countries. Absolutely, yeah. For Brazil, it was clear that Trump was close to Bolsonaro, the former president to Brazil, who was being prosecuted for attempting a coup in Brazil and then imprisoned. And I think that contributed to the heavy tariffs imposed on Brazil. India was even more capricious. It looked like Trump was deeply antagonized by India's refusal to nominate him for the Nobel Peace Prize after he, in his eyes, brought peace between India and Pakistan.

9:48And so the Indians were both outraged and astonished that this should happen. One of the most shocking developments out of all this might be Canada, one of the most outspoken countries in standing up to tariffs. Prime Minister Mark Carney urged friendly countries to work together for strategic autonomy so they can resist U.S. pressure. What impact has this had on the reshaping of global alliances? Well, I think that what Carney did was he articulated what a lot of people were thinking in private, that the U.S. had really gone rogue, and that middle powers had to start actively organizing for a world in which the US would often be a hostile power.

10:27And Carney's recipe was do trade deals amongst yourselves. And he gave that speech in Davos, so it was quite a moment. But he gave that speech just after coming back from China. And I think a number of countries have looked to maybe improve their relations with the Chinese. But I think more significant really is the effort to do trade deals among middle powers. And so these are efforts to not only preserve, but actually expand the network of free trade deals, but in a way that basically goes around the United States. Given that the U.S. has very much soured relationships with its allies, so much so that they've moved to try and cozy up to China, what does that mean for the U.S.?

11:10Look, I think we'll only really get a sense of that over the course of the coming decade. You know, if people are responding to the kind of carny analysis of the world, which is that America's changed very fundamentally, and that we need to make ourselves less dependent on the United States in all sorts of ways, whether that's reliance on the dollar or reliance on American tech, whether people are able to do that, we'll only discover over the course of several years. You know, it's one thing to say this is what we must do. It's quite another to do it. But I mean, I think that there has been an element of hubris in what Trump has been doing, an assumption really that everything he says about America being the hottest economy in the world, the place that everybody wants to be, that it's all true and that there's no alternative to the United States.

12:01And I think that that is overconfident. That was FT News Briefing host Mark Filippino talking with our chief foreign affairs commentator, Gideon Rockman. Tomorrow on The Briefing, we're going to dive into what the tariffs have done to markets. Mark spoke with the FT's Rob Armstrong, who coined the phrase taco trade. Trump always chickens out. You can read more on all these stories for free when you click the links in our show notes, including a link to what we've run in our tariff series so far. This has been your daily FT News briefing. Check back tomorrow for the latest business news.