Yanire Guillén

President Trump has announced a 50% tariff on all Brazilian imports, effective 1 August. His rationale for these tariffs extends well beyond trade disputes.

To understand the reasons behind this announcement, it is important to consider Brazil’s large trade barriers, lack of legal security, recent attacks on freedom of speech, and the ongoing fiscal and economic challenges under President Luiz Inácio Lula da Silva.

Brazil is a country with enormous potential, excellent human capital, and a vibrant entrepreneurial class. However, it is also one of the countries with the highest trade barriers, ranking among the most restrictive globally.

In 2023, Brazil ranked 109th in the Trade Barriers Index, highlighting the significant barriers to trade that make it the worst in the region in terms of open commerce.

These restrictions include elevated tariffs on imports, complex customs procedures, and a proliferation of non-tariff barriers, all of which make Brazil an exceedingly difficult market for foreign exporters, including those from the United States.

The Trump administration has repeatedly mentioned these barriers as justification for reciprocal action. The new 50% tariff is positioned as a direct response to what Trump describes as a “very unfair trade relationship,” seeking to pressure Brazil into reducing its protectionist stance and opening its market to U.S. goods and services.

The decision is also influenced by concerns about attacks on freedom of speech and the use of the legal system to silence opponents, including the accusation of a coup attempt against former president Jair Bolsonaro.

Bolsonaro and his supporters argue that the coup accusations are meritless and politically motivated, claiming that similar tactics are used against political opponents in countries like Venezuela, Nicaragua, and Cuba.

Unpredictable regulatory environments

Another major factor influencing Trump’s decision is the perceived lack of legal security in Brazil. The World Justice Project’s Rule of Law Index for 2023 ranked Brazil 111th out of 142 countries, highlighting issues such as corruption, uneven access to justice, and inconsistent enforcement of laws.

Foreign investors and exporters face unpredictable regulatory environments and significant legal risks.

Another factor behind the tariff decision is Brazil’s recent clampdown on digital free speech. In August 2024, Brazil’s Supreme Court ordered the suspension of X. The ban was seen by many as an attempt to control political discourse and suppress dissenting voices.

“Brazil can survive without trade with the US and will look to other partners to replace it” – Lula da Silva

Trump’s letter announcing the tariffs explicitly condemned Brazil’s “attacks on Free Elections and the fundamental Free Speech Rights of Americans,” referencing the X ban and similar actions against other platforms.

He argued that such measures undermine democratic norms and threaten the open exchange of ideas, further justifying the imposition of punitive trade measures.

President Lula’s response was defiant. In a televised interview, Lula asserted, “Brazil can survive without trade with the US and will look to other partners to replace it.” He emphasised that Brazil’s trade with the U.S. represents only about 1.7% of its GDP.

Brazil faces a clear choice

However, this response obscures a more complex reality: Brazil’s economy is heavily dependent on U.S. and foreign investors.

The U.S. dollar remains the primary currency for trade settlements, foreign reserves, and external debt in Brazil.

Brazil’s public debt is high, at about 80% of GDP, and a significant portion is held by foreign investors. Furthermore, Brazil’s persistent fiscal deficits, around 8% of GDP, require ongoing access to international capital markets

Lula’s administration has struggled to balance ambitious social spending with fiscal responsibility. Efforts to implement a new fiscal framework have been hampered by political resistance and credibility crises, leading to significant currency devaluation and emergency spending cuts.

Most analysts forecast a modest 1.5% GDP expansion in 2025. Persistent deficits, the weak financial situation of state-owned companies, a ballooning public debt nearing 80% of GDP, and a recent $500 million deficit in federal state companies have raised concerns about Brazil’s fiscal sustainability.

A critical issue facing Brazil is significant industrial overcapacity. As of February 2025, Brazil’s seasonally adjusted manufacturing capacity utilisation rate stood at only 78.9%, compared with a long-term average of around 80.8%.

This persistent 20% overcapacity creates substantial working capital challenges for exporters, and the weak financial situation of state-owned companies underscores this problem.

Consequently, Brazil cannot simply offset its sales to the United States with other nations, nor can it easily mitigate its industrial working capital issues.

President Trump’s 50% tariff on Brazilian imports is a response to Brazil’s trade barriers, legal insecurity, recent attacks on digital free speech, and the country’s fiscal and economic challenges under Lula.

Brazil faces a clear choice: negotiate or lose. The Trump tariffs will be eliminated only if legal security and freedom of speech are restored and if Brazil’s elevated trade barriers are at least partially removed.

The fiscal package of the Trump administration, the “Big Beautiful Bill” (BBB), has passed through Congress and the Senate, and it is worth explaining why it is great news and should be defended.

It is sad to see that some analysts have tried to sabotage this programme by arguing that it increases the deficit and does not reduce spending enough.

It is alarming that some libertarians buy into the flawed static estimates and deny the positive effects on growth, investment, and tax revenues from deregulation, tax cuts, and trade negotiations.

The combined effect, even with conservative estimates, massively reduces the annual deficit and the debt-to-GDP ratio.

– The bill includes $1.6 trillion in mandatory spending cuts, the largest in U.S. history in this category.

– $2.6 trillion in discretionary spending cuts.

– $4 trillion in extraordinary revenues from trade negotiations, increased exports, and reduced imports.

– $7 trillion in committed investments.

It is puzzling how some liberals forget the positive effects of deregulation, trade negotiations, and the Laffer curve.

The Big Beautiful Bill is the greatest effort in decades in deregulation, spending cuts, tax reductions, and liberalisation, essential to save the U.S. economy from the disaster inherited from Biden and to achieve more growth and a significant fiscal improvement.

It should be supported not only for its positive aspects but also because the alternative would have been the largest tax increase in U.S. history and a disaster for the private economy and, consequently, the deficit and debt.

Just as happened with Milei upon arriving at the Casa Rosada, Trump is being judged by his inheritance. It seems conservatives and libertarians must produce immediate results upon entering office. Well, in a few months, as with Milei, results will be seen.

These results demonstrate the new administration’s commitment to reducing spending and the deficit in a very adverse budgetary context

When Trump assumed the presidency in January 2025, 97% of the federal budget was already spent and committed due to the outrageous “continuing resolutions” approved by the Biden administration.

It is curious that some in the liberal and libertarian world forget that the fiscal year starts in October and that Biden carried out a huge spending increase between October and December that took effect in 2025.

At the end of 2024, Biden approved an 8% increase in the largest mandatory spending programmes and a brutal 700% increase in the EPA (Environmental Protection Agency) budget. All this left extremely limited room for immediate cuts, especially in mandatory spending.

Despite these restrictions, the Trump administration has managed to reduce discretionary spending by $541 billion in the first six months of 2025, and the accumulated deficit between March and May has decreased.

– In March, the deficit was $161 billion, a 32% reduction compared to March 2024.

– In April 2025, the second-largest fiscal surplus in history was recorded, $258 billion.

– In May 2025, the adjusted deficit was $219 billion, 17% less than the adjusted deficit in May 2024.

These results demonstrate the new administration’s commitment to reducing spending and the deficit in a very adverse budgetary context.

The Big Beautiful Bill is the most ambitious exercise in deregulation, liberalisation, mandatory spending cuts, and tax reductions carried out in the United States and must be defended as an essential giant step to return the economy to the private sector.

Key Measures Included

– Indefinite extension of the 2017 tax cuts, thus avoiding the largest tax increase in the last sixty years. It is unclear why some liberals ignore this second part.

– The first reduction in mandatory spending in five decades: historic cuts without affecting services, totalling more than $1.6 trillion, including $700 billion in Medicaid.

– Elimination of taxes on tips and overtime for workers earning less than $160,000 annually.

Fiscal Impact and Projections

– The fiscal impact is the largest deficit reduction in 30 years.

– The Council of Economic Advisers (CEA) shows that public debt will be reduced to 94% of GDP by 2034, compared to 117% projected under Biden’s policies.

– The annual deficit will be cut in half.

These estimates are conservative and do not assume the positive effects of trade negotiations or additional discretionary spending cuts mentioned by Treasury Secretary Scott Bessent.

The plan aims to reduce the deficit by $11.1 trillion by 2034, combining spending cuts, revenues from trade negotiations, and economic growth stimulus.

In fact, the projection of achieving a primary surplus by 2034 is conservative, and a strong increase in tax revenues is expected from deregulation, tax cuts boosting consumption and investment, and new trade agreements.

This programme is essential as a first step to recover the United States, unlock the U.S. economy, liberalise, reduce spending, and strengthen growth, which should be driven above 3% and up to 4% thanks to attracting investment and businesses.

Criticism and Counterarguments

Organisations like the Congressional Budget Office estimate that the bill could add up to $3.3 trillion to the deficit over the next decade if the positive effects on growth and tax revenues do not materialise.

However, even that estimate is better than the disaster that Harris’s policies would bring, and it does not consider any positive impact from deregulation, the Laffer curve, or revenues from trade agreements.

Remember the alarmist estimates about tax cuts from Ayuso, Meloni’s programme, or Milei’s programme? Keynesians are always wrong because they assign public spending multiplier effects that never occur and assume negative effects from supply-side measures that also do not happen.

Libertarians should not buy into that flawed narrative.

A turning point

The Big Beautiful Bill marks a turning point in U.S. fiscal policy and is an essential step for a more ambitious medium-term strategy. We must value the greatest effort in state reduction and deregulation in decades

If the conservative estimates are met, the United States will not only avoid a fiscal crisis but will also lay the foundations for solid, productive, and sustainable growth.

Reagan was criticised for the same reasons and led the U.S. economy to its greatest period of prosperity and global leadership.

Libertarians should positively value the Big Beautiful Bill because it is a giant step in liberalisation, state reduction, and private sector improvement, and because the alternative was predatory socialism.

When we discuss the economy, it is essential to explain the true causes of the European Union’s stagnation and excessive debt.

One of the causes is a confiscatory and extractive tax system that suffocates small and medium enterprises, which make up most of the European Union’s business fabric. The effective average tax rate for businesses in the EU is estimated at 21.0%.

However, when we account for all direct and indirect taxes, it soars above 35%. Furthermore, the average tax wedge in 27 European countries was 39.8% for a single worker without children, compared to the OECD average of 34.8%. Belgium had the highest at 52.7%. The enormous labour costs are one of the key drivers of weak competitiveness.

Employer social security contributions, a tax on labour, are very high. In France they go from 45% to 68%. This is a clear disincentive to investment, the creation of quality jobs, and the increase in business size, which is a critical factor in Europe.

Regulatory burden

Energy costs are also unacceptably high. EU industrial electricity prices are roughly 2 to 2.5 times higher than those in the US on average. In some EU countries, prices can be more than triple those in the lowest-cost US regions, according to a European Central Bank study (How enduring high energy prices could affect jobs, May 2025).

EU industrial gas prices remain between 2 and 4 times higher than in the US, even after the 2021–2023 energy crisis. This difference is a critical factor for sectors like chemicals, metals, and cement.

The European Union publishes approximately 1,200 regulations, 80 directives and 700 decisions each year, according to Toshkov’s 55 Years of European Legislation using data from the EUR-Lex portal.

Excessive regulation reduces investment, productivity, and per capita income

A simple, facilitating, and clear regulation is positive, but excessive regulation reduces investment, productivity, and per capita income.

The Spanish Juan de Mariana Institute has calculated a “Regulation Laffer Curve” that shows the tipping point when additional regulation hinders economic growth. It shows how Spanish regions like Madrid and the Basque Country, with lower regulatory density, grow much more than others like Catalonia, where the regulatory burden is up to four times higher.

Regulation and taxes

The cost of this fiscal and regulatory excess is enormous.

The cost of excessive regulation in the European Union is estimated at up to €1 trillion per year, or between 3.7% and 12.3% of GDP, according to Eurochambres. In Mario Draghi’s report, “The Future of European Competitiveness,” he explains how internal tariffs raise prices in manufacturing by 45% and in services by 110%

If the European Union abandoned its regulatory obsession, it would unlock a very significant source of growth and investment, which would lift the EU from stagnation, improve tax revenues, and significantly reduce the debt and deficit problem of many of the member states.

The European Union does not have a problem of human capital, entrepreneurs, or financial strength. The EU businesses and banks can compete with the best.

What the EU has is a confiscatory tax system and an enormous bureaucratic and interventionist regulation burden. Bureaucrats consider companies as ATMs to be raided and put small businesses and families at their service instead of them serving the productive fabric.

The European Union needs deregulation and lower taxes instead of constantly blaming an external enemy for its problems.

Most headlines recently have mentioned the US dollar collapse. However, the DXY Index, which considers the US dollar mostly against the euro and the yen, is higher than the average of the 2009-2023 period and, despite the recent correction, stands above the July 2023 low.

Furthermore, the nominal trade-weighted dollar index stands at 125 at the end of this article, which is significantly higher than the 2009–2023 period average and higher than a year ago.

Demand for US dollars and US debt remains robust, according to the Bank for International Settlements, and the latest figures of demand for 10-year Treasuries show a solid 2.67 times bid-to-cover, higher than the average of 2023 and 2022.

Thus, headlines suggesting a global loss of confidence in the US dollar seem more than exaggerated.

Investors should be significantly more concerned about the real collapse in markets, as the Chinese yuan has slumped to 20-year lows against the US dollar.

This new historic low is happening despite the People’s Bank of China’s iron grip on the exchange rate fixing and the world’s largest capital controls.

Many investors attribute this weakness as an engineered measure to boost competitiveness and adapt to rising tariffs.

However, we must remember that the PBOC has conducted a consistent policy of gold purchases, and the currency should have benefitted from the strength in gold holdings and, if it had existed, a shift out of the US dollar. Furthermore, the best way to reduce the impact of tariffs is a strong currency, not a weak one.

The US dollar remains the world’s reserve currency

In the latest figures, the US dollar remains the world’s reserve currency, accounting for 58% of global foreign reserve holdings, far outpacing the euro (20%) and all other contenders, including China’s yuan (2%), according to the Dollar Dominance Monitor.

The US dollar is still used in 88% of foreign exchange transactions and 54% of export invoicing, compared to 7% and 4%, respectively, for the yuan, and 31% and 30%, respectively, for the euro. You must remember that all these percentages add up to 200%, as all global currency transactions include two currencies.

What makes a world reserve a currency?

Challenging the US dollar’s reserve currency status is very difficult, as it requires more than a strong economy or ample gold holdings. To have a world reserve currency, a country needs investors, legal security, ample liquidity, and a transparent banking system.

A reserve currency must be backed by an open, transparent market and independent institutions that provide checks and balances

A reserve currency must be backed by an open, transparent market and independent institutions that provide checks and balances, limiting political interference and strengthening confidence in the currency.

The yuan cannot currently become even a contender for global reserve currency because the issuing country should maintain open financial markets, allow free movement of capital, and support an independent and transparent legal system.

China cannot reach reserve currency status if it maintains capital controls, currency exchange rate fixing, a government-dependent legal system, and a closed financial sector.

Combining the currencies and central banks of the BRICS nations is ineffective because their financial systems lack openness, and their issuers’ independence and legal frameworks are weaker than those of the United States.

Furthermore, the euro has significant challenges as well because it is the only large currency in the world with redenomination risk in case any country leaves the euro area, and the European Union’s legal and investor security frameworks are solid but not as open as the United States institutions.

The dollar’s supremacy

All these factors make it very difficult for any currency to challenge the US dollar as the world reserve currency.

However, the only thing that can really destroy the US dollar as the world’s reserve currency is the United States fiscal and trade policy.

If the United States continues to overspend and its twin deficits remain unsustainable, the supply of US dollars to the world will exceed demand as global investors lose confidence in the issuer’s solvency.

The dollar’s supremacy is rooted in six essential qualities of a reserve currency: economic size, deep and liquid financial markets, full capital account convertibility, a trusted legal system, political stability, and the network effects of widespread international use, according to the Bank for International Settlements.

The confidence in the US’s system can be eroded by an irresponsible fiscal policy and an unsustainable trade deficit

The United States consistently meets these criteria, but the confidence in its system can be eroded by an irresponsible fiscal policy and an unsustainable trade deficit.

The United States may have a small fiscal and trade deficit precisely because it is the world reserve currency, but excessive twin deficits will create the opposite effect; it would put the reserve status at risk.

That was the path that the United States had been taking since 2021, and it was an unsustainable fiscal and trade situation motivated by irresponsible policies.

Trading partners are reluctant to fully embrace the yuan

China has tried to strengthen the international use of the yuan with the Cross-Border Interbank Payment System (CIPS) and support of central bank digital currencies (CBDCs) through projects like mBridge designed to facilitate yuan-based transactions and reduce reliance on the dollar.

However, all these efforts have had a minimal impact on a global scale, as the legal and financial freedom and independence characteristics of the Chinese financial system have not improved significantly.

Similar BRICS initiatives, such as the BRICS Cross Border Payments Initiative (BCBPI) and the Grain Exchange, are created to facilitate trade settlement outside the dollar system.

China’s capital controls are an insurmountable burden that prevents the yuan from becoming a global reserve contender

All this may help reduce the underweight position of the yuan relative to the scale of the Chinese economy, but it cannot challenge the reserve status of the US dollar because of the impediments that Chinese legal, investor security, and financial systems create.

China’s capital controls are an insurmountable burden that prevents the yuan from becoming a global reserve contender. Additionally, the Chinese, Russian, Indian, Brazilian, and South African legal and regulatory environments are less transparent, independent, and predictable than those in the United States.

Furthermore, even strong trading partners are reluctant to fully embrace the yuan, concerned about increasing dependence on a geostrategic rival, according to Dollar Dominance Monitor.

Dominant yuan would lead to dependence on the Chinese government

Many nations understand that US dollar dominance does not mean dependence on the US government, but a dominant yuan would inevitably lead to dependence on the Chinese government.

A financial system and central bank that are as independent from the government as possible are also critical factors for being a reserve currency. This is why questions about the ECB’s independence also limit the options for the euro.

The reason why the media does not report on the record lows of the yuan against the dollar as often and alarmingly as a correction of the US currency is because most analysts and reporters fail to see the implications.

This weakness means that the economy, despite its strengths, is not the beacon of growth and stability that is often portrayed.

The yuan’s record lows against the dollar highlight the strength of the US dollar in the global financial system and the significant problems facing China’s financial and monetary structure.

Furthermore, a weak yuan is a bad omen for the world economy, as it discounts the enduring weaknesses of the build-and-export overcapacity and working capital challenges of the Chinese economic system. It is changing, but it will take time.

Unfortunately, the yuan weakness also shows the concerns about an economic and legal system that has been closing instead of opening barriers.

You cannot be a world economic leader and reserve currency without independent institutions and economic freedom. The only thing that can demolish the US reserve currency’s status is irresponsible spending, twin deficits, and indebtedness from the US government.

The market’s tariff tantrum is a direct result of the previous monetary bubble. Market reaction to the announcement of tariffs may have surprised many, but it is a direct result of two decades of monetary insanity and the excess of 2024.

Thus, the slump in markets cannot be explained without understanding the level of risk accumulated in 2024, with various rate cuts and further monetary easing expected.

Stocks soared despite the economic slowdown, lacklustre earnings, and soaring debt. Two generations of market participants became addicted to rising government spending, debt, and central bank printing, which led to the Tariff Tantrum.

However, we need to avoid the Keynesian messages of doom and understand the real implications of what is happening.

For example, the anti-American narrative is so strong that headlines mention a “dollar crash” with a 2.7% decline in the trade-weighted dollar index year-to-date and talk of a “bond collapse” with a 1.8% real yield.

We can expect more volatility in markets as central banks remain cautious and headlines continue to be focused on negatives. However, money supply growth does not indicate the type of inflationary spiral that some market participants assume, and the latest producer price and core consumer price figures showed disinflation in March.

What should we expect in the next months?

Process of intense negotiation

After the United States government announced the largest set of tariffs in the past hundred years, there is an ongoing process of intense negotiation.

According to a report from the Department of Commerce, “2025 National Trade Estimate Report on Foreign Trade Barriers,” tariffs and non-tariff barriers that the United States faces from its partners are unsustainable.

The administration imposed reciprocal tariffs with the aim of negotiating an improvement in a trade deficit that reached $918 billion in 2024.

The United States government does not seek to balance its trade account completely but rather to reduce the current deficit by half, according to estimates by JP Morgan and Bloomberg.

Tariffs are a last resort and aggressive measure to force a negotiation that levels the trade playing field

Mario Draghi, former president of the ECB, stated in a Financial Times article that the internal barriers of the European Union act like tariffs, raising the costs of the European manufacturing sector by 45% and the service sector by 110%, using IMF data. Even Ursula von der Leyen quoted these words in the European Parliament.

Tariffs are a last resort and aggressive measure to force a negotiation that levels the trade playing field.

The European Union exported goods to the U.S. worth 576.3 billion euros in 2024, according to Eurostat, 19.7% of its total exports.

With a 20% tariff, Goldman Sachs estimates that affected exports could amount to around 190 billion euros (40% of the total sold to the U.S.), reducing the eurozone’s GDP by up to 1%. Germany would suffer more, with an estimated contraction of 1.1%.

All these tariffs, except those to China, which have increased to 124%, have a 90-day moratorium as more than 90 countries have shown a willingness to negotiate.

The impact on inflation

The IMF estimates that tariffs could reduce global GDP by 0.5% and increase inflation by a similar percentage. However, Brevan Howard and some members of the Federal Reserve believe that the impact on inflation will be modest due to the purchasing power of U.S. companies and the elasticity of demand.

Additionally, the White House estimates that this measure will attract billions in investment and jobs to the United States.

The key thing to understand is that countries can negotiate directly with the Department of Commerce to eliminate reciprocal trade barriers, and this would benefit everyone.

Negotiations can lead to the elimination or reduction of tariffs if European countries and the EU remove their trade barriers

Additionally, companies that invest in productive capacity and employment in the United States will not be subject to tariffs. The exemptions will be made individually and by country.

Negotiations can also lead to the elimination or reduction of tariffs if European countries and the European Union remove their trade barriers, particularly bureaucratic, environmental, and fiscal ones, from the CO2 tax and phytosanitary requirements to labelling, packaging, and licensing requirements that act as an impossibility for U.S. exports.

The options for the European Union

The options for the European Union are limited due to its enormous trade surplus with the United States, estimated to be around $160 billion by 2025, according to Bloomberg.

The most efficient solution will be to negotiate the elimination of tariffs, and this can be done by removing the barriers imposed by the European Union.

In doing so, the European Union will also comply with the demands of the Draghi report on European competitiveness and the requests of industries all over Europe.

China will probably maintain the trade war, as it is not going to lift its bans and restrictions on the United States. However, it is very likely that retaliatory tariffs will have a significant impact on growth and employment.

The negotiation cannot be limited to tariff barriers

Trump knows that the world has two Achilles’ heels: overproduction capacity that can only be reduced by selling to the U.S. and the need to bring exporter dollars to support local currencies.

The U.S. is also faced with two significant challenges. Both the trade deficit and the fiscal deficit pose significant challenges for the U.S.

If urgent measures are not taken, the dollar could disappear as a global reserve currency in a few years, and the world may face a global economic depression.

Trump knows that the weakness of the U.S. is also a global weakness because the entire financial system is a carry trade to the dollar. That’s why the negotiation cannot be limited to tariff barriers but rather to the more important ones, the non-tariff barriers.

US trading partner countries have no option but to negotiate

Japan, the EU, India, and 87 nations have already started negotiating with the Trump administration.

US trading partner countries have no option but to negotiate: their trade surplus is so high that there is no possibility of responding aggressively without destroying their own economy.

China is stunned by the impact of its response on its stock market and the yuan, reaching an 18-year low that the PBOC did not expect. Trump knows that no country can replace the American consumer with the Indian, European, or Brazilian.

So far, the EU has proposed reducing industrial tariffs, but that is completely insufficient when the highest tariffs are on agriculture, livestock, and automobiles.

A “power package”

The goal of the Trump administration is to present 70 or 80 trade deals by the end of April and announce up to 6 trillion dollars in investments in the U.S. for the coming years.

Additionally, if the estimated deficit figure drops by 280 billion, the Trump administration could announce the largest tax cut in US history as early as May

Furthermore, the Trump administration wants consumers to see a real reduction in gasoline, natural gas, food, and utilities. Major distributors like Walmart, Costco, Sysco, US Foods, and PFG have communicated to their Asian suppliers that they do not accept price increases on any product under any circumstance.

In summary, Trump wants a “power package” for May in which he presents the world with a substantial number of successful trade agreements, several trillion in investment for the U.S., reduced inflation, and a severely weakened Chinese economy that agrees to open its economy.

The risks are significant. Volatility may persist, central banks may continue sending contradictory messages, China may face a large devaluation of the yuan, and the European Union may not agree to reduce its non-tariff barriers.

No US trading partner has the cards to face a large-scale trade war. That is why there are only two options: negotiate or lose.

The Trump administration has announced an important package of reciprocal tariffs. In the “2025 National Trade Estimate Report on Foreign Trade Barriers”, the US government details all the different tariff and non-tariff barriers imposed by other nations against the United States.

The US administration asserts that these mounting barriers against US companies significantly contribute to the enormous $1.2 trillion goods deficit.

These trade barriers include fiscal, administrative, licence, and so-called environmental limitations that effectively work as tariffs, apart from direct bans and thefts of intellectual property.

What I find fascinating is that most of the United States complaints against the European Union coincide exactly with the claims of the European industrial, agricultural, and farming sectors.

Enormous licence delays; gigantic bureaucratic and investment limits and burdens; senseless regulations; and excruciating taxes.

Trading in the European Union is challenging due to regulatory and economic barriers. The IMF estimates that the European Union’s hidden tariffs through internal barriers increase prices in the manufacturing sector by 45% and a whopping 110% in the services sector.

When one reads the 30-plus pages of the European Union chapter, it is evident that the problem is not the United States protectionism but the European Union’s wall of protectionist measures. Furthermore, lifting those barriers would enormously benefit the European Union and United States companies.

The EU is not willing to negotiate hidden tariffs

Unfortunately, the European Union is not willing to negotiate hidden tariffs and trade barriers. The leaders of each nation prefer to use the United States as a scapegoat, and they have proposed a package of loans, subsidies, and grants that will increase the interventionist nature of the European economies, continue to weaken their agriculture, industrial, and farming sectors, and probably limit growth and investment.

The risk of using tariffs as a negotiation tool is that the opponent might prefer to hurt its citizens rather than change its protectionist policies. The European Union leaders believe that the solution is to close their markets even more and maintain all the burdens we outlined.

Interventionists love any opportunity to be more interventionist and present themselves as the solution to the problems they create

Although the internal burdens in the European Union are so large that they have single-handedly destroyed its industry, there appears to be little to no will to eliminate destructive policies like the 2030 Agenda, the CO₂ tax and other limitations.

Despite the majority of businesses in the European Union advocating for the removal of the barriers highlighted in the US government’s report, governments appear to prioritise protecting job creators, continuing to provide subsidies to North African countries that do not bear the same burdens as US and EU companies, and causing harm to exporters.

Interventionists love any opportunity to be more interventionist and present themselves as the solution to the problems they create.

Companies can negotiate directly

The reciprocal tariffs that the Trump administration has announced can be negotiated. If governments reject this option, business associations and companies can negotiate directly.

Furthermore, European businesses should demand that the European Union abandon its self-destructive regulatory nature and finally lift the tariffs and non-tariff barriers that they impose on investors and job creators.

Regrettably, the world has identified the Trump tariffs as the most convenient target. Now, the mainstream narrative will blame the Trump administration for the inflation the government created by printing and overspending and the economic slowdown engineered by rising public spending, debt, and taxes.

Protectionism only protects governments, and the ones who will pay for all the mistakes made by their leaders will be businesses and families

The world will rejoice at the implementation of even higher protectionist measures to combat the reciprocal tariffs.

Who wins a trade war? No one. Protectionism only protects governments, and the ones who will pay for all the mistakes made by their leaders will be businesses and families.

The world understands that the solution is free trade

The United States needs to reduce its unsustainable trade and fiscal deficit. The world needs to negotiate the barriers against United States trade that have been a norm since 2001.

The rise of protectionism did not come with Trump. Trump is the catalyst who has shown everyone globally that our governments are not champions of free trade but of interventionism

American tariffs are not an optimal solution. They are not even desirable. However, they are the only available option for the United States after almost two decades of rising trade limitations against US companies.

Businesses can negotiate and must demand that their governments address and eliminate the enormous trade barriers that have plagued companies in the past twenty years. It must be a double course of action.

If entrepreneurs succumb to the trap of endorsing their governments with retaliatory measures, they will not only endure the burden of confiscatory taxes and trade restrictions, but they will also bear the brunt of the trade war’s impact on economic growth and sales.

For example, the Spanish government has promised $16 billion in cheap loans and organised various study groups and committees. This will achieve nothing and, at best, make companies more indebted while all the trade barriers remain unchanged.

Only extreme cases should warrant the use of tariffs. They are not ideal; they are neither perfect nor advisable. There are many reasons to criticise them, but we must understand that current levels of unfair treatment in the United States are unsustainable.

So far, the announcement of Trump’s tariffs has converted European and UK socialists into staunch defenders of free trade and open markets. This is already an achievement.

Furthermore, the tariff threat has made the global public realise the enormous trade barriers implemented by their governments. Finally, the world understands that the solution is free trade. It’s time to remove both tariff and non-tariff barriers. We will all win.

German bond yields have soared, with the 10-year bund yield rising to around 2.83%, a jump of 51% from the level of December 2023.

In the past month, yields have risen by 21%, triggered by Germany’s historic “paradigm shift” spending plans, which include a massive defence and infrastructure package.

The sell-off in German bonds triggered an immediate domino effect on European sovereign debt, with French, Spanish, and Italian bonds declining as the European Commission announced a “Rearm Plan” to spend 800 billion euros on defence over four years, financed by new debt.

The European sovereign bond index is down 2.8% in the first two months of 2025 and has declined an extraordinary 14% in the past four years as concerns about persistent inflation add to rising fiscal imbalances and increasing debt plans.

The harsh reality is that European sovereign bonds are not a reserve asset in most balance sheets anymore, and pension funds and institutional investors are reducing their positions in European government debt.

This is the price of inflationist policies. European Union member states believed they could continuously increase their spending and debt because the European Central Bank would always be there to monetarily support them in times of difficulty.

However, this approach has resulted in the destruction of the currency and a decline in governments’ solvency.

Merz abandoned his campaign pledge

The recent slump in German sovereign bonds was the worst since 1990. It occurred following Friedrich Merz’s announcement of a “paradigm shift” in Germany, aimed at taking on debt and increasing the deficit “to boost growth.”

Merz abandoned his campaign pledge to avoid taking on more debt and succumbed to the Keynesian trap in an attempt to attract social democrats to a coalition.

Politicians always announce a boost in growth from government spending and new debt, but it never happens

The Keynesian trap is always the same. Politicians always announce a boost in growth from government spending and new debt, but it never happens, and by the time the voter realises it, they announce that the government must increase taxes because the deficit and debt are too high.

The largest drop in German sovereign bonds since 1990 adds to four years of disaster in the price of European sovereign bonds. The popularity of the future German chancellor is already suffering before even forming a government, as he begins his tenure by breaking his campaign promise not to increase public debt.

European Rearm Plan

The announcement of the 800 billion euro European Rearm Plan, which appears highly ambitious and costly, exacerbates this situation. However, we cannot forget that 650 billion euros simply come from the sum of defence investment commitments already made by member states, and 150 billion euros are loans.

Although the European Commission insists there will be escape clauses and that increased debt for defence investment won’t be penalised, any investor understands that this makes no difference; it means much greater financial strain for states with no fiscal room and more money printing through borrowing, which translates into more inflation and higher taxes in the future.

To tackle the challenges of defence, technology, and competitiveness, the European Union must do much more than just announce more debt.

The European Union has spent over 205 billion euros on fossil fuels from Russia since the start of the war. Therefore, the first thing the EU must do to strategically and economically rearm is abandon the 2030 Agenda and the directives that hinder investment and the development of natural resources. There is no European rearmament without mining.

The EU and its member states must prioritise spending

Additionally, the EU and its member states must prioritise spending. Superfluous and politically motivated spending must be drastically cut to accommodate defence investments. Investors won’t be fooled by a façade of debt.

The European Commission’s excessive deficit protocol has become a ridiculous mechanism for disguising debt. In Spain’s case, government debt under this protocol is 1.65 trillion euros, while the total issued public debt is 2.15 trillion euros.

Germany does not need to increase public spending, deficits, and debt to grow. Copying France’s failed recipe will only lead them to end up in stagnation with uncontrolled debt and deficits.

Why has the market reaction been so negative?

Investing in defence is a necessary but not sufficient condition to innovate, grow value-added sectors and technologies, and lead. We need to do much more.

It is imperative that the European Union abandons central planning—the so-called environmental activism that only impoverishes, slashes tax and bureaucratic burdens, and stops penalising wealth creation and business growth. Every week, the European Union publishes an average of 18 regulations

Why has the market reaction been so negative? Despite a tiny rebound on Friday, Bloomberg’s index of European sovereign bonds has fallen more than 14% over the past four years.

That’s despite all the support from the European Central Bank. What happened? European sovereign debt has become almost toxic due to the inflationary policies implemented in recent years.

Eurozone states believed the European Central Bank would mask their severe fiscal deficiencies. Countries with unfunded commitments exceeding 300% of GDP also announce more debt every time they meet and expect nothing to happen.

If the European Union doesn’t abandon its policy of extending and pretending, it will spark another debt crisis. European sovereign bonds have ceased to be a reserve asset, and latent losses since 2022 are significant. The European Central Bank itself has again reported losses of nearly 8 billion euros.

Investing in defence and infrastructure is fine, but only if the enormous amount of unproductive, inefficient spending that condemns the European Union to irrelevance is slashed. The EU will require more than just spending to overcome its current situation.

Market corrections happen, and the temptation to blame it on the president of the United States rises exponentially when the person is Donald Trump.

However, market corrections have nothing to do with his policy announcements.

In 2016, Trump announced tax cuts, deregulation, government spending cuts and tariffs. In 2024, Trump also announced tax cuts, deregulation, government spending cuts and tariffs.

It makes no sense to blame the current administration after less than two months in office and ignore all the warning signs that built up in the past months.

Market busts always come because of the previous debt excess.

Five datapoints allow us to identify the real reason for the market correction.

Persistent inflation: Market participants are often hooked on easing policies because dovish central banks mean a higher money supply growth, lower rates, declining bond yields and equity multiple expansion.

However, if inflation soars, investors pull away from risky assets, expecting lower or no rate cuts and contraction in the money supply.

Inflation expectations in the United States began to rise in 2024 around mid-year, with significant shifts becoming evident by June. The Federal Reserve increased their 2024 inflation forecast to 2.6% from 2.4% in their 12 June 2024 projections.

The Federal Reserve’s policy was highly dovish

However, the Federal Reserve’s policy was highly dovish. It panicked in June, when Treasury bond yields soared, and delayed its pace of normalisation of the balance sheet, effectively signalling a dovish stance that prioritised liquidity over inflation. Furthermore, the Federal Reserve decided to cut rates in September despite persistent inflation.

The New York Fed’s Survey of Consumer Expectations shows that median one-year-ahead inflation expectations remained relatively stable at 3.0% through much of early 2024 but began to edge up later in the year.

By the end of 2024, consumer expectations had surged to a 15-month high. By December 2024, the Consumer Price Index (CPI) hit 2.9%, with a 0.4% month-over-month increase, indicating a reacceleration. The 24% cumulative inflation of the past years was followed by inflation’s stickiness—particularly in shelter and services—prompting a reassessment among consumers and businesses of the outlook for inflation.

Uncontrolled government spending and deficit: The Biden-Harris administration accelerated government hiring, spending and debt in an election year, creating a fiscal and monetary time bomb as well as perpetuating inflation.

The federal budget deficit for 2024 totalled $1.83 trillion, according to the U.S. Treasury Department’s final Monthly Treasury Statement. This marked an increase of $138 billion (8%) from the $1.69 trillion deficit recorded in FY 2023, making it the third-largest deficit in U.S. history and the largest in a year of peace, with record tax receipts, employment and economic growth.

Federal debt reached a record $35.5 trillion by the end of FY 2024, a $2.3 trillion increase from FY 2023, according to the GAO’s audit of the Bureau of the Fiscal Service’s Schedules of Federal Debt.

Furthermore, gross interest expenses reached $1.126 trillion, up $251 billion from 2023, despite a dovish Federal Reserve containing bond yields.

In the period between 2021 and 2024, government spending accounted for 24% of all economic growth

In the period between 2021 and 2024, government spending accounted for 24% of all economic growth (GDP) and government jobs soared by more than one million; spending rose by $2 trillion from the 2019 level and $617 billion (10%) in 2024 alone, reaching $6.752 trillion.

In the last months of 2024, reports of acceleration in government spending led to an $86.6 trillion 10-year spending plan (FY 2025–2034), according to the Congress Budget Office, with various senators claiming it front-loaded costs.

Debt accumulation: A dovish and confident Federal Reserve also led to market participants and consumers taking on more debt, expecting a steady path of rate cuts. The messages from the Federal Reserve changed from optimistic about inflation to cautious in the last months of 2024.

In markets, FINRA Investor Margin Debt reached $937.253 billion as of 1 January 2025, marking a record high and reflecting a year-over-year growth of 33.41%.

At the end of 2024, U.S. credit card debt reached a record high, reflecting a massive 13% increase throughout the year. According to the Federal Reserve Bank of New York, total credit card balances hit $1.21 trillion in the fourth quarter of 2024. This is a $45 billion increase from Q3 2024’s $1.166 trillion. It marks a 3.9% quarterly rise and pushes the total to an all-time high since the New York Fed began tracking in 1999.

Fed goes from bullish to bearish: The Federal Reserve changed radically its tone from optimistic to a cautious stance on inflation towards the end of 2024, with this shift becoming particularly evident around November 2024 and solidifying by December 2024.

This caution fully took hold by 18 December 2024, with the revised projections and Powell’s explicit statements

This shift marked a transition from a rate-cutting cycle initiated in September to a more deliberate, wait-and-see approach as 2025 loomed.

The time bomb was already set. Soaring government spending, federal and private debt, expecting various rate cuts in 2025, and a 180-degree policy change regarding interest rates in the last two months were aligning alongside an expensive market, as the valuation of the S&P 500 and Nasdaq reached 22 and 32 times, respectively, close to 20% above its average in the case of technology names.

Furthermore, the market was heavily concentrated in its returns. Five stocks—NVIDIA, Microsoft, Apple, Amazon, and Alphabet—contributed approximately 42–47% of the S&P 500’s 2024 market increase.

What caused the current correction is a combination of irresponsible fiscal policy driving debt to new heights. Misguided guidance from the Federal Reserve pushed private and market participants debt to record highs, expecting an easy and rapid disinflation process. This would lead to lower rates and more liquidity.

The Biden administration bloated economic growth and job gains with federal spending and debt. The Federal Reserve contributed to the excess panicking by cutting rates too much and too fast and delaying its balance sheet normalisation to try to limit the impact of the irresponsible fiscal policy on Treasury yields. The result was a perfect storm.

The Fed went hawkish, debt continued accelerating, and the economic slowdown, which was already evident in the last three quarters of 2024, all erupted at once when the market exuberance was pricked by two catalysts.

The Tech sell-off caused by the overblown Chinese artificial intelligence impact and the reduction in risk required by investment firms’ risk management teams to accommodate for a reality of persistent inflation and higher rates.

Trump may have arrived when the bubble burst, but he did not create it.