By Michael O’Neill

President-elect Trump will be bouncing his way across the threshold into the Oval Office while singing about how wonderful tariffs are. And why not? It was a key reason he won the election.

Trump dubbed himself “Tariff Man” in a tweet on December 4, 2018. On January 20th, he gets to don the superhero costume for real, and countries—China in particular—are bracing for economic havoc. Beijing faces a minimum 40% increase in tariffs within a few days of Trump taking office. Such an increase would knock about 1.0% off 2025 GDP, and Chinese officials are already grappling with a weak economy.

The Chinese aren’t the only ones fearing tariffs. Most developed markets are quaking in their boots, including Canada. The Canadian economy is treading water, and according to the Peterson Institute of International Economics, Trump’s tariff proposals would lower GDP by 0.4% almost immediately.

But let’s not get carried away just yet. Trump blusters and bellows with plenty of drama but is often light on specifics. While his proposed Commerce Secretary, Howard Lutnick, is a fan of tariffs, he sees them as leverage in trade negotiations and as a tool to protect U.S. industries from foreign competition. He doesn’t favor tariffs on goods that the U.S. doesn’t produce.

Leverage is the Magic Word

Trump loves leverage. He said as much in his 1987 book The Art of the Deal, claiming it as the most crucial element in any negotiation. He argues that to succeed, you must identify what the other party values most and use it to your advantage. Trump wrote, “The worst thing you can possibly do in a deal is seem desperate to make it. That makes the other guy smell blood, and then you’re dead.”

The Walking Dead

And speaking of dead, U.S. inflation certainly isn’t. And if Trump follows through on his campaign promises, economists of all stripes say that prices would rise. The Peterson Institute suggests the tariffs would cost the average U.S. household $2,600/year. The jury is still out on that claim, but if tariffs reinvigorated inflation, the Fed would be hard-pressed to fulfill its twin mandate of maximum employment and stable prices.

That’s what bond traders are thinking, and they have sharply downgraded their expectations for steep U.S. rate cuts. The U.S. 10-year Treasury yield climbed relentlessly in the weeks before the election and continued after the results were known, rising from 3.70% at the beginning of October to 4.44% on November 20. It’s not all on Trump. The U.S. economy continues to chug along without much evidence of significant slowing.

Out of the Frying Pan….

November markets have been all about Trump and the Fed, but there are other, more nefarious characters at play.

The stakes are global, the players unforgiving, and the consequences have the potential to eclipse any economic cycle. At the epicenter are Russia, China, and Iran—three nations testing the boundaries of diplomacy, military strength, and global patience.

Russia’s war in Ukraine isn’t just a European problem; it’s a global fault line. Putin’s aggression has fragmented energy markets and disrupted global food supplies. Recently, Mr. Putin upped the ante by threatening to unleash nuclear weapons to counter what he claims is Western aggression by the U.S. and NATO.

Meanwhile, in Asia, the stakes are even higher. Taiwan is the flashpoint in the world’s most dangerous geopolitical rivalry. China’s military posturing and rhetoric signal its intent to take the island—by force, if necessary. The U.S., bound by its commitments to Taiwan’s security, would almost certainly be drawn into a conflict. Such a war wouldn’t just upend regional stability; it could fracture global supply chains, particularly in semiconductors, and unleash economic chaos of historic proportions.

It doesn’t stop at Taiwan. China has designs on the entire South China Sea, despite the World Court ruling it has no valid claim.

Then there’s the Middle East—a powder keg that never cools. Iran’s nuclear ambitions and its proxy armies keep the region on edge. A miscalculation here—an airstrike, a blockade, a retaliatory attack—could ignite a crisis that spills over into oil markets and sends shockwaves through the global economy.

These are not abstract risks; they are tangible, looming threats with the power to reshape the global order. Tariffs, rate hikes, and inflation seem like minor skirmishes in comparison. Geopolitical tensions aren’t just today’s headlines; they are tomorrow’s defining challenges.

The immediate challenge will be the headlines around the incoming Trump administration, which will roil markets until his inauguration on January 20.  Until then, “the wonderful thing about tariffs is tariffs are wonderful things.”