How can countries strike back against US tariffs?

On the surface, there seem to be few options. As new Canadian PM Carney said recently, Canada can impose its own tariffs but its ability to match the US dollar for dollar is very limited given that the economy is one-tenth the size of the US. In other words, the US will always ‘win’ a tariff war if others reciprocate with their own tariffs given its size and the fact that it is the world’s big deficit nation. However, there is another way. And it is a way that could, perhaps counterintuitively, make everyone a winner.

The alternative way is to recognise the fact that the counterpart of the US’s huge USD1tr-plus annual current account deficit is a similarly-sized surplus in the financial accounts. After all, the balance of payments always balances, give or take a few ‘errors and omissions’. And rather than ‘attacking’ the US through the trade side of the balance of payments, by imposing reciprocal tariffs, a better option might be to attack through the financial accounts. This means reducing the amount of foreign savings that are sent to the US.

Now admittedly, some countries and regions are in a better place to do this than others. The EU, for one is in a particularly good place given that its investment funds, pension funds etc already have an unhealthy preference for US assets over those in the EU.

For instance, nearly 50% of European equity UCITS funds were allocated to the US at the end of 2023 compared to under 20% in 2012. It is easy to see why, and it is not just down to the fact that US equity returns have been much higher than those in Europe. It is also due to the fact that the EU is generally a poor place to put savings given issues such as the fragmentation of the asset management industry.

For here we see that firms working across different countries in the EU will face different rules in each country and there is not a single supervisory mechanism as there is in the US. The EU Commission recognises this and, on Wednesday presented a report that seeks to turn the tide. Now this document does not list withdrawing capital from US assets as an aim. Instead, the aim is to direct more of the EU’s savings into investment in the region, meaning both direct investment and financial investment. But clearly given that such a huge portion of EU savings goes to the US, it stands to reason that the EU’s gain from such a redirection will be the US’s loss.

However, the problem, as ever with the EU, is that plans such as these take years to come to fruition. The EU’s plan to create a ‘savings and investment ’, to use its terminology may only serve to roll the eyes of those that have waited patiently for the much-promised banking . But does it matter if the EU drags its feet? For what could happen is that savers and investment firms in the EU recognise that the tide is slowly turning from the US to the EU and get ahead of this by reallocating cash from the US to the EU.

Indeed, this might be part of what’s happening right now and it could potentially be a structural change that we see over many years, not just many weeks. In some senses we might say that it is similar to what has been happening in China as holdings of US treasuries by Chinese investors falls just as the authorities try to encourage more investment at home.

Steven Barrow, Head of Standard Bank G10 Strategy, said responding to US tariffs through the financial account, rather than through the trade account might be more beneficial for these countries. For a start, if the EU could return at least some of the USD325bn it invests outside of the region to investment projects inside the EU the benefits could be immeasurable. But how could this benefit the US as well, as we mentioned earlier? In Steven Barrow’s view, reciprocating via the financial accounts would help reduce the US trade deficit (remember the balance of payments always balances) and arguably produce a weaker US dollar; something else that the administration wants to see. In fact, one might even be forgiven for thinking that the ‘madness’ of the US tariff policy might be done with this in mind.