US Tariffs Slow Global Trade but Boost International Investment Appeal

Economic

Summary:

US tariff policies under President Donald Trump are dampening global trade growth but prompting a shift in investment flows toward international markets, with foreign equities outperforming US stocks for the first time since 2022....

Global Trade Expansion Loses Momentum

The World Trade Organization’s latest report shows global trade is expected to grow only 0.9% in 2025, down sharply from 2.9% in 2024. The slowdown is closely linked to Washington’s aggressive tariff measures, which have prompted US importers to front-load purchases before higher duties take effect. While the WTO forecasts a modest recovery to 1.8% growth next year, the outlook remains weaker than earlier projections. WTO Director-General Ngozi Okonjo-Iweala noted that uncertainty from US tariffs is undermining business confidence and supply chain stability. The absence of a retaliatory tariff cycle among major economies has prevented deeper damage, but the trade environment remains unsettled.

Tariffs are not only reshaping trade but also influencing capital allocation. For the first time since 2022, international equities are outperforming the S&P 500, with markets in Mexico, Canada, Germany, Spain, Brazil, the UK, and Vietnam posting gains of 11–26% this year. Vietnam’s VN-Index rose around 25% to 1,584.95 points in early August. The MSCI World Index excluding the US has climbed 18% in 2025, more than double the S&P 500’s 7.8% increase.

This performance gap reflects a combination of high US equity valuations, slower domestic growth, and stronger policy reform momentum abroad. Analysts note that pro-investment measures in Europe, Japan, and Canada are attracting capital seeking better value and long-term growth potential.

Tariffs as a Core Driver of Investment Shift

Rising import duties threaten to erode US corporate profits, especially in sectors heavily dependent on global supply chains. In contrast, European and Japanese firms are cushioned by domestic policy support and structural reforms. According to Purpose Investments’ Craig Basinger, these differences are encouraging investors to reallocate from US assets into international markets that offer both policy stability and competitive valuations.

While global markets are currently benefiting from this capital rotation, strategists at Manulife John Hancock caution that a US recession could trigger spillover effects worldwide. Nonetheless, in the present environment, diversifying into international equities is seen as a viable long-term opportunity, with global policy divergence and investment-friendly reforms creating fertile ground for sustained returns outside the US.

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Economic

A Persistent and Expanding Deficit

Data from Japan’s Ministry of Finance shows the country posted a 14.6 trillion yen current account surplus in the first six months of 2025. Yet within the services account, a 1.38 trillion yen overall deficit was driven in large part by a 3.48 trillion yen shortfall in digital services. Although this was 3.3% lower than the same period in 2024, it remains the second-largest on record and 2.6 times higher than in 2015.

The digital deficit covers telecommunications, computer and information services such as cloud computing; professional and management consulting services including online advertising; and royalties and license fees for streaming content. Despite record tourism receipts of 3.61 trillion yen in the same period, gains from inbound travel were almost entirely offset by digital outflows.

Reliance on Foreign Platforms and Services

Japan’s growing dependence on US technology companies is evident in long-term increases in online advertising spending and the post-pandemic surge in cloud service adoption. Consumers are also paying more for video streaming and other digital content. The rise of artificial intelligence is adding to import costs as businesses adopt advanced AI tools from overseas providers.

This structural reliance limits Japan’s leverage in trade negotiations. Unlike sectors such as manufacturing or energy, the country cannot offset US tariffs with digital trade surpluses, leaving it vulnerable in talks with the Trump administration, which prioritizes reshoring American production.

Future Risk Projections

The Ministry of Economy, Trade and Industry (METI) projects Japan’s digital trade deficit could hit 18 trillion yen by 2035, nearly triple 2024’s 6.8 trillion yen. In a pessimistic scenario, where foreign firms capture more market share, the gap could soar to 28 trillion yen surpassing the 25 trillion yen Japan spent on mineral fuel imports in 2024.

While a widening deficit can signal technological dependence, it may also reflect businesses advancing in their digital transformation. The critical factor is whether imported digital services generate productivity gains, innovation, and competitive capacity. Without this, Japan risks sustaining high costs without sufficient economic return.

METI highlights shortages in funding, digital specialists, and data resources for R&D. As transformative technologies such as quantum computing emerge, coordinated public–private investment will be needed to strengthen domestic digital infrastructure and reduce strategic reliance on foreign platforms. The challenge is to turn the digital trade gap from a symbol of dependency into a channel for innovation-led growth.

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Economic

EU Sanctions: Symbolic More Than Structural

In July, the EU added India to its 18th sanctions package targeting Russia, banning imports of refined petroleum products made from Russian crude and sanctioning Indian refiner Nayara Energy, partly owned by Rosneft. The move was framed as a political message rather than a decisive economic blow, as analysts noted India could replace Russian-sourced refined fuels with imports from countries like Iraq without significant disruption. Despite the symbolic escalation, experts such as Jacob Funk Kirkegaard of Bruegel believe the sanctions will not derail ongoing EU–India trade talks.

The far greater challenge comes from Washington. President Trump’s warning of tariffs up to 50% on Indian goods over continued Russian oil purchases poses a substantial threat to India’s trade exposure. With no bilateral trade agreement to buffer the impact, the prospect of such duties strengthens India’s incentive to diversify trade partnerships and lock in predictable economic relationships, positioning the EU as a logical alternative.

Mutual Strategic Interests

Analysts argue that the shifting US–India dynamic inadvertently benefits Brussels. Garima Mohan of the German Marshall Fund points out that India now needs stable and investment-friendly partners, while the EU’s pragmatic approach particularly its sensitivity to India’s politically charged agricultural sector, which employs about 44% of its population makes it a more appealing counterpart. Avoiding demands for sweeping agricultural market liberalization increases the probability of securing a deal.

Should India reduce its Russian oil imports to sidestep US tariffs, it would indirectly cut a significant revenue stream for Moscow, aligning with EU and Ukrainian interests. Yet, Indian diplomats caution that removing Russian crude from global supply could drive oil prices sharply higher, potentially hurting all consumers. This underscores the complex interplay between trade negotiations and global energy stability.

Despite the friction from EU sanctions, both sides remain motivated to conclude a free trade agreement. The realignment of India’s strategic calculus hinges more on Washington’s tariff posture than Brussels’ punitive measures. In this environment, geopolitical pressure is acting less as a wedge and more as a bridge, drawing New Delhi and Brussels toward a trade pact that could reshape their economic and strategic relationship.

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Stocks

Economic

Rapid Price Gains Outpace Fundamentals

Hanwha Aerospace, LIG Nex1, Hyundai Rotem, Korea Aerospace Industries (KAI), and Hanwha Systems have all seen sharp share price increases this year, driven by optimism over rising global defense budgets and South Korea’s growing arms exports. The rally has lifted their price-to-earnings ratios (PER) well beyond historic norms, with Hanwha Systems at 61, LIG Nex1 at 44.1, KAI at 37.1, Hanwha Aerospace at 32.1, and Hyundai Rotem at 23.5. By comparison, Lockheed Martin’s PER is projected at 19.6 in 2025.

Even with forecasts for a slight pullback in 2026 Hanwha Systems at 38.5, LIG Nex1 at 33.9, KAI at 24.7, Hanwha Aerospace at 23.1, and Hyundai Rotem at 21.6 the multiples remain well above Lockheed Martin’s projected 14.7. A similar gap appears in EV/EBITDA ratios: LIG Nex1 stands at 28.5, Hanwha Systems at 27.6, KAI at 21.3, Hyundai Rotem at 19.3, and Hanwha Aerospace at 13, compared to 12.8 for Lockheed Martin. These figures indicate South Korean defense firms are trading at valuations significantly higher than their current earnings or cash flow would justify.

Earnings Growth and Market Risks

In Q2 2025, the combined operating profit of the four largest contractors Hanwha Aerospace, Hyundai Rotem, LIG Nex1, and KAI exceeded 1 trillion won (about USD 719 million) for the first time, supported by a surge in backlogged orders. However, much of the anticipated export revenue has yet to be converted into actual sales. This creates a correlation between current stock prices and future delivery performance; if revenues materialize slower than expected, the rapid run-up in share prices could reverse, leaving valuations exposed.

Analysts note that while the structural growth in defense demand supports long-term expansion, the present premium pricing embeds aggressive assumptions about contract execution and profit margins. The gap between market capitalization and realized earnings potential suggests that, without continued strong order fulfillment and sustained export momentum, South Korean defense stocks may struggle to maintain their elevated levels.

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Economic

Commodity

Asian Rice Market Under Pressure

India’s 5% broken parboiled rice fell to 369–374 USD/ton this week, its lowest since August 2022, down from 375–380 USD last week. White rice of the same grade is priced at 360–368 USD/ton. According to B.V. Krishna Rao, head of the Rice Exporters Association, the rupee’s weakness has allowed exporters to cut prices and remain competitive, though US demand could fall after President Donald Trump announced a tariff hike to 50% on Indian imports effective August 28, 2025.

Vietnam’s 5% broken rice is now at 391 USD/ton, down from 395–400 USD last week, pressured by the Philippines’ decision to suspend imports to protect domestic farmers. In Thailand, prices for the same grade hold steady at 370 USD/ton, but buyers are delaying decisions amid India’s plan to release up to 7 million tons from reserves.

US Grain Futures Weighed by Abundant Supply Outlook

On August 8, Chicago Board of Trade wheat futures fell 3.75 cents to 5.145 USD/bushel, corn lost 1.5 cents to 4.055 USD/bushel, and soybeans dropped 6.25 cents to 9.875 USD/bushel. Weekly US export data came in stronger than expected, suggesting low prices are stimulating demand. Recent corn sales to Mexico, Guatemala, and other buyers provided partial support, along with pre-report buying ahead of the USDA’s monthly supply-demand update due August 12.

Analysts expect the USDA to raise corn production forecasts given favorable growing conditions, which could deepen supply pressure despite short-term demand recovery. The interplay between strong crop outlooks and demand spikes is keeping market sentiment volatile.

Coffee Prices Surge on Tightening Supply

Coffee markets rallied sharply on August 8, with London robusta for September delivery up 143 USD to 3,561 USD/ton, and New York arabica for September up 11.55 cents to 309.35 cents/pound. Brazil’s July green coffee exports fell 20.4% year-on-year to 161,000 tons, adding to supply tightness.

A stronger Brazilian real, at a one-month high, also discouraged exporter selling. Vietnam’s domestic coffee prices have surged, with average prices reaching 103,800 VND/kg, up 2,200 VND in a single day. This reflects a direct relationship between tightening global supply and rising domestic farmgate prices, reinforcing the bullish short-term outlook for the coffee market.

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Economic

Consumer Prices Hold Steady Amid Food Price Decline

Official data from the National Bureau of Statistics shows China’s July consumer price index (CPI) unchanged from a year earlier, outperforming Reuters’ forecast of a 0.1% drop. The stability came despite a 1.6% year-on-year fall in food prices larger than June’s 0.3% decline highlighting subdued consumer spending. Severe weather also added stress to the economy. On a month-on-month basis, CPI edged up 0.4%, with core inflation, excluding volatile food and energy, rising from 0.7% in June to 0.8% in July.

The producer price index (PPI) fell 3.6% year-on-year in July, deeper than economists’ 3.3% forecast and matching June’s drop the steepest since July 2023. This marks over two years of continuous PPI contraction, underscoring ongoing industrial overcapacity and price competition pressures. Initial government measures to curb aggressive price-cutting in key industries have yet to yield meaningful results. Current restructuring efforts are smaller in scale compared to the sweeping supply-side reforms a decade ago that helped reverse deflation at the time.

Structural and External Headwinds

Beyond price trends, the macroeconomic environment remains fragile. A prolonged property sector downturn continues to weigh on household spending and industrial activity, while a fragile “trade truce” with the United States leaves manufacturing sentiment vulnerable to renewed tariff risks. These conditions reinforce the link between weak domestic demand and sustained producer price deflation, though the relationship remains shaped by both cyclical pressures and structural industry imbalances.

Rather than deploying broad-based stimulus, policymakers appear focused on containing what they call “disorderly competition” in sectors such as automotive manufacturing. Analysts, however, doubt that such targeted interventions will significantly boost consumer purchasing power. Without a stronger demand-side push, the combination of stagnant CPI and prolonged PPI deflation may keep China’s recovery on an uneven path, with persistent downside risks to growth in the second half of 2025.

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Economic

Tariff Pressure Hits the Auto Industry

After a strong first half of the year, US car sales are showing signs of cooling as tariffs begin to weigh on the market. According to Yale University research, the nationwide average tariff rate will climb above 18% from August 7 under the administration’s latest trade measures. New agreements with the European Union and Japan have set a base 15% tariff on cars six times higher than the 2.5% rate that brands like Toyota and Mercedes paid before April 2025.

Automakers initially absorbed the higher costs to shield buyers but can no longer sustain these losses. General Motors paid 1.1 billion USD in tariffs in Q2 alone and projects up to 5 billion USD for the year, reflecting its extensive supply chain ties with Canada, Mexico, and South Korea. Ford has increased its estimated profit loss from tariffs to 2 billion USD, while Hyundai expects a 606 million USD hit, Volkswagen 1.5 billion USD, and Stellantis 1.7 billion USD.

The financial strain is prompting manufacturers to pass costs on to dealerships and buyers. Ford has already raised prices for models imported from Mexico, such as the Bronco Sport and Mustang Mach-E, while luxury brands like Porsche are also adjusting pricing.

Consumer Impact: Higher Payments and Fewer Options

The average new car price, at 48,907 USD in June, is projected to surpass 50,000 USD by year’s end. Edmunds reports that 19.3% of buyers now have monthly auto loan payments exceeding 1,000 USD, a record high. Combined with rising repair and insurance costs, vehicle ownership is becoming more burdensome, particularly for younger and lower-income buyers.

Beyond affordability, model diversity is shrinking. To protect profit margins, manufacturers are prioritizing higher-margin pickup trucks and SUVs while scaling back production of small, low-cost sedans. This trend limits choices for budget-conscious consumers and could permanently reshape the vehicle mix in the US market.

Electric Vehicles Under Threat

Electric vehicles face the sharpest contraction as federal policy shifts away from EV incentives. The 7,500 USD EV tax credit will expire on September 30, and several automakers are canceling or delaying EV programs to avoid high development costs. This comes as much of the global automotive industry accelerates EV investment, leaving the US at risk of falling behind in the sector’s technological race.

A Bank of America analyst warns that the next four years will be among the most unstable in the history of US automakers’ product strategies. The combination of higher tariffs, shifting consumer demand, and global competition is creating a volatile environment that will challenge both industry profitability and consumer affordability.

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