Global Politics: Overexposed, Underexposed, Spot-on

Afbeelding

Tariff threats as a means of geopolitical pressure have become a familiar pattern under Trump, but markets are starting to systematically dismiss them as bluffs – and rightly so, it seems, based on the recent Greenland episode. In early January, the US president threatened to impose 10% import tariffs on exporters from eight European countries that opposed US control over Greenland, including threats of military options. Within days, de-escalation followed: after talks with the NATO Secretary General, Trump withdrew the threat, announced a "framework for a future deal" on Greenland and the Arctic region, and ruled out the use of force. European and US shares rose immediately; the now almost classic TACO rally. 

This market reaction – buying dips on TACO expectations – is understandable and has been profitable so far, but the real cost lies in the creeping erosion of confidence in the US as a reliable partner. Repeated bluffing against allies fuels skepticism among central banks, sovereign wealth funds, and institutional investors outside the US: why hold long-term Treasuries when the threat of sudden policy changes is structurally higher? Markets are pricing in the immediate growth shock of tariffs, but still seem to underestimate the increasing risks of investing in longer-term US government bonds.

Incidentally, not every threat was pure bluff, of course: during Trump's first term, for example, tariffs on steel/aluminum and China were actually implemented. There is a risk that an ally will actually push back at some point – think of coordinated European counter-tariffs or Canadian retaliation on energy exports – creating an escalation cycle that will hit the markets hard, as they were not prepared for this due to their TACO attitude. 

Moreover, the more TACO trade becomes mainstream, the more Trump may feel compelled to follow through on his rash words with rash actions in order to maintain credibility. 

So far, the market is rewarding de-escalation, but the cumulative damage to American soft power and the credibility of the dollar as an anchor is structural. Even if Trump continues to feed the markets TACOs, the global economy will ultimately pay the price for the uncertainty he creates.

Afbeelding

Trump's second term is characterized by a systematic attempt to dismantle US checks and balances and hijack state institutions and use them against political opponents. What began as norm-breaking behavior in his first term has evolved into a structural transformation of the federal government. This is not a temporary hiccup, but a profound shift. It is an executive-first approach that undermines the independence of the judiciary, science, and the central bank. 

The Trump administration has issued executive orders to stop the alleged "weaponization" of federal agencies, but critics see this as a move to enforce loyalty and carry out "purges" in agencies. The pressure on the Fed is intense: Trump has openly pushed for rate cuts to lower borrowing costs, while lawsuits, among other things, are testing the Fed's independence. 

Institutional watchdogs such as courts still act as a brake, but the trend is clear: the rule of law is being applied selectively and the predictability of policy is eroding. The widespread attention this is receiving is justified, because the US still forms the anchor of the global financial architecture. When the largest and most important player undermines its own institutions, sooner or later American assets will be affected:

• This translates into higher risk premiums on Treasuries, as investors demand greater compensation for uncertainty about future policy. 
• Exchange rate volatility increases, particularly in the dollar, as its safe-haven status comes under pressure – not due to a sudden exodus, but due to a gradual erosion of confidence. 
• The Fed's room for maneuver is shrinking: political pressure could lead to loose monetary policy, with the risk of higher inflation in the longer term and a more limited response to future shocks.

For the global economy, this means an acceleration of fragmentation. Allies and rivals are responding by strengthening their own buffers: Europe feels under siege and China is exploiting the space to expand its influence. Global capital flows will falter, cross-border investments will be subject to a structural risk premium and supply chains will remain under pressure due to policy uncertainty. 

In short, the economic and market impact of the American political revolution will become increasingly visible in the form of reduced growth, higher financing costs, and a slower response to global crises.