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US trading partners are readying a response to President Trump's recent barrage of tariff threats, including a potential 30% levies against the EU and Mexico announced over the weekend. In a piece for the publication Foreign Affairs, Queens College Cambridge President Muhammad Alien wrote that the US has quote shaken the very foundations of the global order, adding that there is no trusted conductor to guide countries and companies through the complicated transition to whatever is coming next.
Joining me now is Muhammad El Arian. Uh, always a pleasure to talk to you, Muhammad, and thanks for being here. Um, obviously in what continues to be a very uh, tricky time here. So, I guess I would ask first whether you think we are witnessing a sort of remaking of the global order, it seems like there have been so many fits and starts, it's it's difficult to get that big picture.
So I think that we are no longer in a world of uber globalization where we looking for ever closer integration of goods and people and flows. The question is are we in a world in which there is manage globalization light or total fragmentation? That's the question mark and we're not going to know this for another few years I think.
Julie and I thought the other thing that that was very interesting that you wrote in your piece is that the US is almost behaving like a developing nation rather than its sort of um global dominant status. What do you mean by that and what are the implications of that? So we seeing market correlations that normally are more common to developing countries than the US.
for example, the currency weakens even though yields are going up. That shouldn't happen. Um, the negative correlations between bonds and equities has broken down. So, you're starting to see things and you're starting to hear narratives that are more common in developing countries than in the US. And I think that that's partially because the US is trying to remake its domestic system.
There's a real question mark as to whether this is a Reagan moment in which the US changes things with a view to a better outcome or is this a Jimmy Carter moment in which the US ends up in stagflation and ultimately recession which do you think it is Muhammad or if you if we don't yet know how will we start to know
so first let me tell you the market is all over the place on this we started the year with an 80% probability that this was a Reagan moment. By the beginning of April, we were below 50%. And now we're somewhere around 70%. So we have fluctuated a lot and that is unusual for the US with its mature institutions and big diversified economy.
I think it's a 50/50. I don't think we know. I think it will depend on how other countries react as well. So, it's a 50/50, but the marketplace right now seems more comfortable than I would be with where we're going. Well, I wanted to ask you about that because what do you make of the extreme equity resilience uh here in the US in the face of all of this back and forth?
So, I think there's two things going on. One has to do with the view that corporates aren't the sovereign that you may have issues with the sovereign but at the end of the day US corporates are strong good balance sheets good innovations that's one view the other view is that people ultimately think that we are the US is escalating to deescalate that what we heard over the weekend against the European Union against Mexico is negotiation And come August 1st, one of two things are going to happen.
Either we're going to push the deadline out yet again or the US will get what it wants from its trading partners. So the markets are pretty relaxed about this. Um more relaxed than I would be, but I understand that is the trade that has worked over and over again. And you don't want to get in the way of something that's been working.
Muhammad, um, as as we and our viewers know, you are a longtime veteran, very well-known investor. What they may not know, you've also served on a number of corporate boards. You're currently uh on the board of Under Armour. So, I'm not going to ask you specifically about those businesses, but I am going to ask you about your that experience um with these corporations and how they're tackling this current moment and how challenging or not maybe they're finding it.
So most CEOs I know will tell you that we are in a wait and see. Julie, we're waiting to see what is going to evolve and that's important because it impacts your supply chains. It impacts how you think of where your markets are. Um so whereas the financial markets seem comfortable, what we seeing on the CEO side is postponement.
postponement of major investment plans just waiting to see. It makes a huge difference whether the tariffs are 30% or 10%. It makes a huge difference whether the tariffs are volatile or whether they're going to be fixed. So companies are doing what most people would do is you know what I'm not going to commit multi-year investment funding until I know what landscape I'm operating in.
So the markets, you know, of course about this acronym taco, right? Trump always chickens out that the markets seem to have adapted to some extent, but when it comes to being a corporation, it's you can't really, I guess, bet on that kind of acronym, right? But I mean, do you think the markets ultimately were wrong about Taco or or do we still not know where that's going to how that's going to play out?
So the marketers were right in saying that the the deadline will be pushed back and will be pushed back again. That's correct. What we don't know is ultimately what the destination is. So the journey has been consistent with a much longer time frame than what economists were afraid of. But we still don't know what the destination is going to look like.
I I'm hoping that we are going towards some sort of globalization light that is managed more that the US feel that it's trading in a fairer trading system that is no longer is responsible for so many public goods that are really expensive. That's what I'm hoping we're going towards. But we could just as well end up in a fragmented global economy.
And for companies, what you're going to hear, for example, under Trump 1.0, We went from this notion that China can be your market. China can be where you have supply chains. Do you need C++ one or C plus2? One or two other countries to increase your resilience. Now you hear C plus many. And some some companies don't even want the C.
They just want the many. And that means rewiring your supply chains. And that's not something that you do quickly. It takes time to do so. And it is expensive. Uh I'm glad you brought up C China um because um I know there is some um some strategists are have speculated out there that part of the reason that the market hasn't reacted more to the tariff headlines is because they haven't involved China lately, right?
Most of the focus has been elsewhere and China is the big elephant in the room so to speak. Uh do you think there's any truth to that and and what do you think we need to watch for when it comes to China headline risk? So, we know from Mexico, for example, that if you if you're not in focus today, it doesn't mean you're not going to be in focus tomorrow.
Um, I think Mexico was surprised over the weekend to hear about the possibility of a 30% tariff. Um, they thought they had sorted that out. So, I don't think China is out of the woods. I don't think anybody is out of the woods right now until we settle um this tariff issue. But there's a broader issue with China which is how quickly will it reform its economy.
China right now is no longer a locomotive of global growth. In fact, the concern and we saw the export numbers today. The concern is that China will start dumping its exports on other markets especially the European Union which will cause trade tensions there. So keep China on the radar screen. you know, you cannot just you cannot ignore it right now.
Uh Muhammad, finally quickly, since you mentioned the EU, um the block says it's preparing a response, but it's willing to continue to negotiate in the meantime. There's some reports that the EU might be looking to other countries to sort of form some alliances. Uh what do you think of that? And do you think that the EU remain I mean Europe generally the stock market has been a good investment this year.
Do you think that continues as a result of their positioning? So I think the European financial markets are benefiting from the fact that the whole world was massively overweight the US starting this year. The US had outperformed other countries consistently. The US is where the major drivers of innovations are and the US has a fiscal policy that's quite loose.
So there was reason to invest in the US during the year. What you've had is a realization that that overweight is excessive and that's why European markets have outperformed US markets so much in the first quarter by 17 percentage points, Julie. 17 percentage points. Um I think that for for the outperformance of Europe to continue, Europe has to get its act together.
It's one thing that having capital pushed out of the US back into Europe. What Europe really needs is to be able to pull back, attract the capital back and it hasn't been doing enough for that as yet. Very interesting stuff. Muhammad, always a pleasure to talk to you. Thank you so much. We really appreciate it. Thanks to adding
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