Economy

The EU will propose retaliation for US so-called “reciprocal” tariffs early next week, the European Commission said on Tuesday as it struggles to respond quickly to the trade war begun by President Donald Trump.Trade spokesperson Olof Gill said the Commission would present its retaliation plan to member states, although it would still prefer to negotiate with the US if possible.“Our door is open and we are ready to talk,” he said, while admitting that “things are not getting better, they are getting worse”.Trump has placed sectoral tariffs on EU steel, aluminium and cars, and a 20 per cent “reciprocal rate” on almost everything else.So far Brussels has only responded to the metals tariffs, and its original list of countermeasures for those has been watered down after lobbying by member states.The original €26bn of US goods due to be hit by the countermeasures, which matched the quantity of European goods affected by US tariffs, has been reduced to €21bn, said two officials.Products such as bourbon, wine and dairy products have been removed thanks to requests from Italy, France and Ireland, according to a leaked proposal on which member states will vote on Wednesday. Those countries had feared the impact of any potential further retaliatory tariffs from the US on their own food and drinks products. Trump had threatened a 200 per cent levy on European alcohol if bourbon was hit.US goods including soyabeans will be affected by the EU’s retaliatory measures More

This is an on-site version of the White House Watch newsletter. You can read the previous edition here. Sign up for free here to get it on Tuesdays and Thursdays. Email us at whitehousewatch@ft.comGood morning and welcome to White House Watch. Suit up for our tariff deep dive — and don’t forget your oxygen tank so you can keep breathing:The latest tariff chaosBourbon leviesUnhappy billionairesWe’re moving closer to a full-blown trade war after China vowed to “fight to the end” if Donald Trump pressed ahead with his threat to ratchet up tariffs again on the world’s second-largest economy. Yesterday, the US president said he’d impose an additional 50 per cent tariff on Chinese imports if Beijing didn’t remove its retaliatory tariff today. That would bring levies on Chinese imports to more than 120 per cent, heaping pressure on American companies with Chinese suppliers.In the Oval Office yesterday, Trump defended his draconian trade policy, despite the market turmoil:I don’t mind going through it, because I see a beautiful picture at the end. Countries that really took advantage of us are now saying ‘please negotiate’.We’re going to have to reset the table on trade. And when we do, we’re going to come out unbelievably well.Wall Street stocks rode a rollercoaster yesterday as an anonymous X account falsely claimed that there would be a 90-day tariff pause. All three major indices briefly turned positive before the White House denied it and sent stocks back down. US government debt sold off sharply, too, as hedge funds cut back on risk in their portfolios and investors continued shifting into cash.Trump said “we’re not looking” to pause tariffs to allow for negotiations, but “many countries” were reaching out to negotiate with US officials. “We’re going to get fair deals and good deals with every country, and if we don’t, we’re going to have nothing to do with them,” Trump said.Amid the tumult, Federal Reserve chair Jay Powell has an unenviable dilemma: defend the economy (by cutting interest rates to help prevent an economic slowdown) or contain inflation (by keeping rates up to pre-empt a new burst of high prices). Meanwhile, companies are on the hunt for creative ways to cut the customs value of their imports to the US in an effort to blunt the financial impact of the tariffs, and large institutional investors are studying options to shed stakes in illiquid private equity funds.Global stocks regained some ground this morning, and US futures are up more than 2 per cent. Follow today’s market moves with our live blog. The latest headlinesWhat we’re hearingBillionaire financiers, including some of Trump’s allies, are lambasting the president’s tariffs as they reel from the market turmoil.Ken Langone, the co-founder of Home Depot and a longtime Republican donor, told the FT’s Alex Rogers and James Fontanella-Khan that Trump’s levies had been set too high and implemented too quickly:“I believe he’s been poorly advised by his advisers about this trade situation — and the formula they’re applying.”He also called the 46 per cent tariff on Vietnam “bullshit” and said the 34 per cent additional levies on China were “too aggressive, too soon” and didn’t give “serious negotiations a chance to work”.Billionaire hedge fund manager Bill Ackman, who backed Trump’s 2024 campaign, called the tariffs “a major policy error” that he had earlier said was akin to “launch[ing] economic nuclear war on every country in the world”.He alleged on Sunday that commerce secretary Howard Lutnick and his company Cantor Fitzgerald would profit “when our economy implodes”, before backtracking yesterday. Shares in Ackman’s main fund, Pershing Square Holdings, have fallen 15 per cent this year as the trade war hits his portfolio. Stanley Druckenmiller, a billionaire and mentor to Treasury secretary Scott Bessent, posted over the weekend: “I do not support tariffs exceeding 10%.”In his annual letter to shareholders yesterday, JPMorgan Chase chief executive Jamie Dimon also criticised the duties, saying “the quicker this issue is resolved, the better because some of the negative effects increase cumulatively over time and would be hard to reverse”, though he avoided writing anything too incendiary.ViewpointsRecommended newsletters for youFT Exclusive — Be the first to see exclusive FT scoops, features, analysis and investigations. Sign up hereBreaking News — Be alerted to the latest stories as soon as they’re published. Sign up here More

Bob McCauley is a non-resident senior fellow at Boston University’s Global Development Policy Center and associate of the faculty of history at the University of Oxford.Kindleberger’s Trap is the danger that a fading hegemon lacks the ability but the ascendant one lacks the will to supply the world economy with vital public goods — such as a reserve currency. In the 1930s, the Bank of England lacked the ability to continue to serve as international lender of last resort, and the ascendant Federal Reserve lacked the will to do so.As a result, crisis spread from Austria to Germany and Britain and ultimately reached the US, turning the post-1929 slump into an era-defining economic collapse. The Kindleberger Trap led to “the world in depression”, as Charles Kindleberger titled his seminal book. This is why worries over whether the Federal Reserve will continue to supply dollars to overseas central banks at times of financial strife are such a big deal. As Reuters reported last month:Some European central banking and supervisory officials are questioning whether they can still rely on the U.S. Federal Reserve to provide dollar funding in times of market stress, six people familiar with the matter said, casting some doubt over what has been a bedrock of financial stability.The sources told Reuters they consider it highly unlikely the Fed would not honour its funding backstops — and the U.S. central bank itself has given no signals to suggest that.But the European officials have held informal discussions about this possibility — which Reuters is reporting for the first time — because their trust in the United States government has been shaken by some of the Trump administration’s policies.These concerns are warranted, both in light of the Trump administration’s distaste for America’s traditional alliances and the centrality of the Fed’s swap lines to global financial stability. As Deutsche Bank’s chief FX strategist George Saravelos highlighted in a recent report on the topic, doubts over the Fed’s willingness or ability to step up when needed is a “nuclear button” for the dollar’s future:Ultimately, a withdrawal of the Fed as the international lender of last resort is equivalent to a suspension of the dollar’s role as the safest of global currencies. Doubts about a commitment from the Fed to maintain dollar liquidity — especially against major allies — would accelerate efforts by other countries to reduce their dependence on the US financial system. It would ultimately lead to lower foreign ownership of US assets and a broad-based weakening of the dollar’s role in the global financial system.In the 2008 and 2020 dollar panics, the Fed wisely told 14 central banks that the buck starts here. Through official swap lines the Fed could extend its credit to each central bank against domestic currency as collateral. Each central bank could in turn lend the dollars to banks in its market against domestic collateral.Reaching outstandings as high as $598bn in 2008 and $449bn in 2020, the swaps succeeded in stabilising global dollar markets. The amounts were not small, but offshore dollar lending — both on- and off-balance sheet — is measured in the tens of trillions of dollars. Thus, with pennies on the dollar lent and repaid with interest, co-operating central banks calmed these potentially destructive dollar panics. The US also won from the Fed’s international provision of dollars. Crucially, the swaps reversed market-driven interest rate hikes on Libor-priced US corporate loans and mortgages, which in turn would have hammered US jobs and consumption. As Saravelos pointed out:Had the Fed not stepped in during the 2008/9 financial crisis and Covid pandemic, the reserves of foreign central banks and international lenders like the IMF would unlikely have been sufficient to meet global dollar demand, leading to an even greater surge in dollar borrowing costs than occurred at the time, defaults, and potentially systemic implications for the global financial system.What if a crisis like 2008 or 2020 happens and the Fed does not swap dollars? Central bankers would not be doing their jobs if they weren’t asking this question.If it came to such a scenario of “politicise[d] . . . recourse to the dollar swap lines,“ the Fed would have the ability but not the will, as in 1931. Any other single central bank might have the will but not the ability.However, central bankers could form a dollar coalition of the willing. The central fact is that the 14 central banks that had standing and temporary Fed swaps in 2008 and 2020 collectively hold lots of dollars. Their collective holdings of US safe assets amounted to an estimated $1.9tn at the end of 2021. (Their total foreign exchange reserves at the end of 2024 were about double that sum.) That $1.9tn is big money. It’s triple the previous maximum drawing on the Fed swap lines in 2008, and four times larger than the peak 2020 usage. © Deutsche BankLeadership could arise among the Fed’s standing swap partners, the European Central Bank, Bank of Japan, Swiss National Bank, Bank of England, and Bank of Canada. The ECB and BoJ were the largest users of the Fed swap lines in 2008 and 2020, respectively. During the 2023 run on Credit Suisse, the SNB acquired unique experience in tapping the New York Fed for $60bn against US Treasury collateral under the FIMA (foreign and international monetary authorities) repo facility.The coalition could enlist the Bank for International Settlements for technical support as agent as European central banks did in 1973-95. Or the BIS could serve as intermediary, as it did when the New York Fed lent dollars through the BIS to offshore banks in the 1960s to prevent funding crunches.However, there is a major wrinkle: the $1.9tn is invested, and a crisis calls for cash dollars. In a world where the Federal Reserve refuses to allow access to its swap lines, would the New York Fed continue to provide same-day FIMA repo funding against Treasuries held in custody?If it did, the coalition could arrange to access hundreds of billions of dollars in same-day funds. If the Fed did not, then it would end up providing ad hoc funding.Without the FIMA backstop, heavy central bank sales of US Treasuries would rock the US bond market. Such selling could prod the Fed into the market as buyer of last resort — as in March 2020, before the FIMA repo was introduced.Without the FIMA backstop, the Fed similarly would have to cap market repo rates if central banks sought to repo Treasuries for cash in size. However, the recent benchmark rate shift from dollar Libor to repo-based Sofer means that the Fed’s own domestic monetary transmission requires well-behaved repo rates. One way or another, the coalition would need to work with the Fed to manage any “dash for cash.” Even a large pool of dollar reserves would not stack up to “whatever it takes” Fed swaps. Limits excite. It may be, as Eurosystem sources grimly noted to Reuters, that “there is no good substitute to the Fed.” Nonetheless, a dollar coalition of the willing could pool trillions of dollars to backstop global dollar funding with no more than self-interested Fed help. An inferior lender of last resort beats no lender of last resort. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The cost of insuring against debt defaults in Europe’s car industry has soared, as investors ditch bonds in the sector in response to US President Donald Trump’s tariffs.The auto sector’s slump in response to punitive tariffs, which includes a 25 per cent levy on vehicle imports, means that it now stands out as Europe’s biggest debt market casualty.“It’s been a continuation of the bloodbath of last week . . . it is going to hurt the vast majority of carmakers,” said Gianmarco Migliavacca, a senior credit analyst at Neuberger Berman.The prices of Aston Martin’s bonds issued last year fell to all-time lows on Friday and continued to drop on Monday, with one bond tumbling more than 9 per cent since Friday to as low as 82 pence on the pound.In the credit default swaps market, the cost of insuring against Volkswagen defaulting on its bonds in the next five years climbed by 30 basis points to 154bp — the highest level since the Covid-19 pandemic — between Friday and Monday.Despite VW being one of the sector’s stronger performers, investors had increased their bets that the German carmaker would struggle to service its debt. The price of VW’s five-year credit default swap recovered slightly on Tuesday, falling by almost 5bp.The lossmaking Aston Martin is exposed to Trump’s tariffs because it does not manufacture its vehicles in the US, but the market accounts for 37 per cent of its annual revenue.It is expected to take a hit of as much as £30mn to its gross profit as a result of the US tariffs, people close to the company said.Suffering from a sales slowdown in Asia, the company had expected to be aided by growth in the US. Those hopes have been damped by an increasingly gloomy economic outlook in the US.Aston Martin is one of the sector’s more challenged names and at present operates with £1.16bn of debt at double-digit interest rates, with investors demanding hefty compensation to hold its bonds.The group recently announced plans to raise more than £125mn with the sale of its minority stake in the Formula 1 racing team and additional investment from its chair Lawrence Stroll. VW, meanwhile, has said it wants to use US sales growth to offset sliding sales in China and Europe, although it only has a 4 per cent market share in the US. The German group is exposed to the US tariffs on the EU because it imports part of its US sales from Europe, while its luxury Audi and Porsche brands are all made outside the US. China’s slowdown has also hit VW.“China’s market has become increasingly difficult and less profitable for carmakers,” said Migliavacca. “North America was to offset this . . . now North America is much less profitable.”Credit spreads for car suppliers elsewhere in the auto supply chain, including France’s Forvia and Germany’s ZF Friedrichshafen, also widened as tariff fears continued to fuel a sell-off throughout Europe’s auto supply chain.Analysts have said the auto parts suppliers are likely to be hit harder by the tariffs due to their lower margins especially after US officials revealed last week that a wider than expected range of car components would be subject to the 25 per cent tariff from May 3. Forvia, which supplies parts to Stellantis, Tesla and China’s BYD, said last month that it expected the industry to take an “enormous” hit from Trump’s tariffs.The price of Stellantis’s five-year credit default swaps has jumped by 40bp since the beginning of April, from 170bp to about 210bp.“Putting 25 per cent on significant flows of purchases for the sum of the industry automatically has a very significant impact,” said Forvia’s chief financial officer Olivier Durand.At the weekend, Jaguar Land Rover announced it had suspended all shipments of cars to the US for a month, as it works out a longer term response to Trump’s tariffs on vehicle imports. More

This article is an on-site version of our Chris Giles on Central Banks newsletter. Premium subscribers can sign up here to get the newsletter delivered every Tuesday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersThe Trump administration has just blown up the global trading system. Now what? Markets have dropped as investors, businesses and individuals scramble for answers. History is no guide: in the context of an integrated global economy, the US’s decision to pull up the drawbridge truly is unprecedented and — even on the highly implausible assumption that nothing changes — it will take years, if not decades, for the full impact of “liberation day” to unfold. But where precedent fails, textbook models can help. The new tariffs amount to a negative supply shock — lowering output, raising prices and hurting demand. This means nothing good for the US or global economy and will force the Federal Reserve to make hard choices. Ruchir Sharma argued yesterday that the Fed should hold firm to avoid further endangering its credibility, after it was damaged by its response to the post-Covid inflation surge. But there are also economic reasons for policymakers to be hawkish.Adding up the shocksThe US may be a relatively closed economy, but it cannot emerge unscathed from its effective tariff rate rising by around 20 percentage points in less than three months (that is, according to an estimate by the Yale Budget Lab). Higher import prices will feed through to businesses, which will face higher production costs, and households, which will face higher sticker prices.Some content could not load. Check your internet connection or browser settings.Higher production costs will lower output, while higher prices for consumer goods will weigh on real incomes. US households are no longer flush with savings or particularly keen to splurge in the same way they were in the wake of the pandemic. For this reason, household spending is likely to take a hit faster than it did in 2021 (the last time inflation surged).Businesses facing lower profits and reduced demand will cut back on investment as well as spending. The administration is betting on manufacturers responding to the tariffs by increasing their production capacity within US borders. But capital spending requires certainty, and certainty is in short supply in Trump’s America. Between the White House’s record of bluster, the rising likelihood of political pushback and the potential for bilateral deals, it will take a long time to persuade businesses that the new trade regime is here to stay — and that they should make investment decisions on its basis. Domestic capacity is unlikely to rise anytime soon, even if that’s what Trump says tariffs are designed to do. In sum, while the negative demand effect of tariffs calls for easing at the margin, their positive price and negative output effects give policymakers reasons to keep the benchmark rate high — and to potentially raise it further. An inflationary backdropThe Fed will need to work out which of these effects will be dominant. That in itself is not obvious. But policymakers should also consider that, beyond tariffs, Trump’s economic policy agenda threatens to unleash numerous other inflationary forces on to the US economy. Four in particular stand out. The first is fiscal policy. Republicans’ flagship initiative this year is the extension of Trump’s 2017 tax cuts. The House and the Senate are currently negotiating a budget resolution bill which they will need to agree on in order to unlock the reconciliation process. The House’s plan features much more significant offsetting spending cuts than the Senate’s. But under neither plan is the deficit set to fall. Even if tariffs raise revenues at the margin, the US’s fiscal stance is set to remain expansionary.The second is the dollar, which has weakened since “liberation day”. Some analysts have suggested this indicates a looming confidence crisis in the US currency. While that is hard to prove conclusively, many of the Trump administration’s policies do seem specifically designed to discourage its use in global reserves. Indeed, an agreement to weaken the dollar in exchange for tariff relief was the putative basis of a much-discussed, but likely moot, “Mar-a-Lago accord”. The debate over the greenback’s future may rumble on, unresolved, for months or even years. Its recent decline, however, will have immediate and very real effects, pushing up the prices of imports further. Some content could not load. Check your internet connection or browser settings.The third is inflation expectations, which as Chris Giles noted last week, had already started to move upwards in some consumer surveys ahead of “liberation day”. The full effect of the tariff-driven import price surge will take some time to show up in the data. Nevertheless, with post-pandemic inflation in consumers’ recent memory, policymakers fear the public will be less likely to treat a new run-up in prices as merely temporary.The fourth is immigration. Since taking office, enforcement officials have carried out brutal deportations, after the Trump administration expanded their powers to conduct raids on undocumented migrants. The White House wants to scare them into leaving the US of their own accord. Some surely will, while others will leave formal employment and enter the informal economy to minimise their chances of being detected. Whatever political plaudits Trump may accrue through this hardline approach, the economic effects are not to be celebrated. With illegal immigrants accounting for about 5 per cent of the labour force according to Pew data, a significant drop in their participation would tighten the labour market, creating upward pressure on wages.For now, nothing in the data calls for easing. Inflation is still well ahead of the Fed’s 2 per cent target, while March’s payrolls report, released two days after “liberation day”, was quite a bit stronger than market expectations. While the labour market may roll over in the next few months, policymakers should not act in anticipation. Instead, they should only deliver the next rate cut when the data definitively shows a sustained increase in unemployment. Trump vs the Fed Trump has never had much regard for the Fed’s independence. He is likely to value it even less if his administration’s stagflationary policies require the central bank to maintain a tight monetary stance as the US economy weakens. The jawboning tactics were out already on Friday, but they could get worse. In the coming months, the White House could step up its attacks on the Fed to shift the blame for tariff-driven inflation on to the central bank. Such a move would be highly disingenuous, and would require some seriously contorted economic reasoning. But that is unlikely to matter to the administration.While Trump will have no qualms about putting the FOMC in an uncomfortable position, the Fed should not be cowed. It should remain guided by the pursuit of its dual mandate in light of the economic data — and it should not be afraid to be hawkish if required, irrespective of how the White House might respond. What I’ve been reading and watchingThe FT’s data journalists have put together a bunch of charts showing some of the many ways in which the US’s new trade regime is entirely unmoored from economic realityGillian Tett revisits the work of Albert Hirschman (of the Herfindahl-Hirschman Index) to make sense of Trump’s tariffsAlan Beattie’s guide to what’s next for global trade — and Tej Parikh’s take on why this all might not lastFor a longer read, I’m enjoying Evan Thomas and Walter Isaacson’s The Wise Men. It’s a collective biography of six foreign policy advisers to US presidents serving after 1945 — some household names, such as Dean Acheson and George Kennan, others not — and how their outlook shaped the US-led international order that Trump is now taking apartRecommended newsletters for you Free Lunch — Your guide to the global economic policy debate. Sign up hereThe Lex Newsletter — Lex, our investment column, breaks down the week’s key themes, with analysis by award-winning writers. Sign up here More

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldWe should trust in Donald Trump’s instincts, says Mike Johnson, Speaker of the House of Representatives. Alternatively, Johnson and his caucus should run screaming in the opposite direction. It is too late for Republicans to revert to being a normal party — belief in Trump is their organising principle. But they could play the loyalist by coaxing Trump off the ledge. In addition to their jobs, the future of the global economy, and every American’s retirement fund, depends on it. Their task is complicated by the fact that Trump still thinks he is on to a winner. Try to stand in his shoes. From his 2011 Obama foreign birth conspiracy to his 2024 conviction as a felon, and so many points in between, Trump has almost annually been left for dead. But his phoenix keeps rising. Trump is a fantasist whose deepest-lodged fantasy — that he is an unstoppable champion — keeps coming true. Why would a little market turmoil stop him?The starting point is that Trump is a hammer and the rest of the world, as well as half of America, is a nail. Sometimes the hammer can focus on select nails, or soften its blow, but he is always a hammer. That some of Trump’s closest backers, such as the New York hedge fund manager Bill Ackman, are surprised by his global tariff war is a mystery. Trump vowed in almost every single campaign speech to unleash the trade war we are now in. He has been blaming foreigners for ripping off America since the mid-1980s. Note, his obsession was with Japan, not the Soviet Union. Trump has always been angriest with allies and friends. His deepest contempt is now reserved for Europe and Canada. Psychologists extrapolate from the estate settlement Trump tried to impose on his own siblings. If your instinct is to rip people off, including those closest to you, assume that is everyone’s method.The mystery is why so many — from Ackman’s fellow billionaires to Florida-based Venezuelans — have bent over backwards to miss who Trump is. A trillion comments have been wasted accusing the wrong people of Trump derangement syndrome. The real TDS afflicts those who keep seeing a rational actor, or an economic chess game, where none exists. The whole market arguably suffers from this syndrome. Shortly after plummeting on Monday morning, a fake news release surfaced that said Trump would announce a pause on his tariffs this week. The markets more than erased their opening losses. All those gains, in turn, were wiped out when the White House issued a denial.If an online meme can turn a bear market into a bull recovery in the space of a minute, and back again, Trump has the world in his palm. The merest rumour that he might be sane can trigger a buying frenzy. Roman emperors would envy the finger-crooking sway of one man. Yet at some point, possibly imminent, Trump could be forced to pause at least some of his “liberation day” duties. That will trigger a big relief rally. But his pause will be no surer than stray driftwood. The same might apply to his threats of a new 50 per cent tariff escalation on China.Markets will cheer any hints of bilateral deals Trump plans to strike with more influential demandeurs — Japan, China and India should be closely watched. Investors should also pay heed to the fact that such deals will be struck between foreign governments and Trump personally, not his administration. The departments of Treasury, commerce and the US trade representatives are often out of the loop. Given the lack of boundary between Trump’s public role and private investments, the scope for non-trade-related bartering is great.The idea that Trump’s impact will be limited to the goods-traded economy is also wishful thinking. Foreigners own a critical share of US Treasury debt. Continued high demand for an asset in whose issuer the world is losing trust is the difference between a Trump recession and a Trump depression. On this, Europe’s governments seem to have better instincts than the equity and fixed-income markets. Rather than escalate the trade war, the EU is mulling only a modest toolkit of retaliations. This is not because Brussels thinks Trump is likely to embrace comity. It is because it fears a tit-for-tat trade spiral will break the global financial system. Either way, this teachable moment is needlessly belated. Trump’s sane-washers have forfeited their credibility. There is no school of foreign policy realism, or trade mercantilism, that could explain Trump’s actions. If you want to forecast the world, study his psychology. While Trump is in charge, stay short on America.edward.luce@ft.com More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The EU and China should work to reach a “negotiated resolution” to provide “stability and predictability” for the global economy in the face of US tariffs, European Commission president Ursula von der Leyen has said after a call with China’s Premier Li Qiang.US President Donald Trump has roiled global financial markets with his announcement of sweeping tariffs, prompting China and the EU to table retaliatory measures that risk a full-blown global trade conflict.Brussels officials want to ensure co-operation with Beijing as they aim to contain any escalation and limit the damage to the European economy, given the huge size of their respective markets and the large volumes of goods shipped between the EU, US and China.Brussels is also fearful that Chinese exports diverted from the US by Trump’s measures could shift to the European market and exacerbate the economic pain for domestic manufacturers suffering from the tariffs.“President von der Leyen called for a negotiated resolution to the current situation, emphasising the need to avoid further escalation,” the commission said in a statement following what it called her “constructive discussion” with Li on Tuesday.The two leaders discussed “setting up a mechanism for tracking possible trade diversion and ensuring any developments are duly addressed”, the commission said. “President von der Leyen emphasised China’s critical role in addressing possible trade diversion caused by tariffs, especially in sectors already affected by global overcapacity.”It added: “In response to the widespread disruption caused by the US tariffs, President von der Leyen stressed the responsibility of Europe and China, as two of the world’s largest markets, to support a strong reformed trading system — free, fair and founded on a level playing field.” China has been portraying itself as a bastion of stability in the global trading system, and experts in the country have called for Beijing to pursue agreements with countries other than the US.But China’s huge trade surplus with the rest of the world, which reached nearly $1tn last year, has led to tensions not only with the US but increasingly with the EU and large developing countries.Some content could not load. Check your internet connection or browser settings.The EU and other trading partners argue that Beijing is investing too much in manufacturing while not doing enough to stimulate domestic demand in China, which is suffering from a deep property slowdown.Beijing, meanwhile, has accused the EU of being protectionist for imposing tariffs on imports of Chinese electric vehicles. “Whether China-Europe relations can achieve greater development depends on both sides’ ability to meet halfway,” said the Global Times, a Chinese Communist party nationalist tabloid, in an editorial.It said China had delayed for three months additional tariffs on French cognac that it had imposed in retaliation for the EU levies on Chinese EVs. But it said Europe continued “focusing on addressing its own concerns while inadequately considering China’s reasonable requests”. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Turkey has a chance to outperform other emerging markets hit by Donald Trump’s tariffs “once the dust settles” thanks to manageable US trade exposure and lower oil prices, the country’s finance minister said.Mehmet Şimşek told the Financial Times that the collapse in oil prices would narrow the current account deficit of energy-importing Turkey and thus help rebuild international reserves, a closely watched metric of the macroeconomic reforms he launched around 18 months ago.Slowing global growth and tight domestic money policies were also “disinflationary”, which would help get Turkish inflation down — a central aim of Şimşek’s stabilisation programme.On US tariffs, Şimşek argued Turkey’s $1.3tn economy was relatively insulated as 80 per cent of its trade is with countries with which it has a free trade agreement, such as its customs union with the EU, or with “friendly neighbours” in the Middle East, central Asia and north Africa.Trump, who has good relations with Turkey’s President Recep Tayyip Erdoğan, placed the baseline 10 per cent tariff on Turkish exports to the US.“All of this is relatively constructive,” Şimşek said. “When the dust settles, we hope and believe Turkey could positively decouple” in investors’ eyes from more troubled emerging economies in Asia and elsewhere.Last year, bilateral trade with the US totalled $32bn, about 5 per cent of Turkey’s overall trade in goods, with a $1.5bn surplus in Turkey’s favour, according to US data.Şimşek’s economic programme faced its harshest test yet last month following the arrest of Istanbul mayor Ekrem İmamoğlu, the country’s star opposition politician and biggest rival to Erdoğan, sending Turkish financial markets plummeting.“There was a large but brief impact from domestic political-driven turbulence. Now [the turbulence] is tariff-driven,” Şimşek said in an interview.“In relative terms, our vulnerability is not so bad. We may have to live with softer growth. But what is, is: you have to live with external shocks such as these [US tariffs],” he said.İmamoğlu’s detention led to Turkey’s largest street protests in over a decade and forced the central bank to raise interest rates and spend billions to support the currency.İmamoğlu denies the corruption charges, with critics decrying his arrest as evidence of Erdoğan’s increasing authoritarianism. Government officials have said it shows that nobody is above the law.The lira has since stabilised and most analysts concur the country has got through the worst of that bout of market instability, although at the price of keeping interest rates high. Inflation fell to 38.1 per cent in March, compared to its peak of 75 per cent last May. Interest rates are currently 42.5 per cent.Although expected to hold rates this month, Turkey’s central bank is benefiting from “normalisation in domestic dollarisation and non-resident outflows following strong pressure on reserves in the first three days” following İmamoğlu’s arrest, Barclays analysts said in a note.Şimşek conceded that a slowing Turkish economy would mean lower tax revenues and this “could lead to wider budget deficit” than forecast. But, Şimşek stressed, the main point of a small fiscal deficit was to help the central bank get inflation down and not to stop Turkish debt rising, which is only around 25 per cent of GDP. The budget deficit had been forecast to fall to 3.1 per cent of GDP this year, from 4.9 per cent in 2024.“We will maintain spending discipline regardless,” he said. “Big picture, we can live with this.”Şimşek is viewed as a cornerstone of Turkey’s return to economic orthodoxy after the cheap credit policies previously favoured by Erdoğan brought runaway inflation and a balance of payments crisis.Many investors and analysts also believe that the recent market ructions have strengthened the position of Şimşek and other reformers in government, as their programme provides Erdoğan with an economic bedrock.“As long as Şimşek stays I think the market should provide an anchor against political instability,” Tim Ash, a long time Turkey watcher and sovereign strategist at RBC Bluebay Asset Management, wrote in a recent blog.Longer term, however, there are concerns that weak rule of law and continuing political instability could weigh on Turkey’s economy.Şimşek declined to talk about politics but said he was “all in favour of the rule of law, achieving price stability, enhancing predictability [and] improving the investment climate. Those are music to my ears.”Additional reporting by Joseph Cotterill in London More