(en anglais seulement)

Hello and welcome to our latest video #MacroMemo. There is, as always, quite a lot to talk about. We're recording this on July 29th, and so we're looking forward to the August 1st tariff deadline.

I should say looking ahead, not so much forward to that deadline. So we can talk about that. We can talk about some of the trade deals that have been struck recently. We'll certainly discuss some Canadian tariff thoughts in that context as well. And we'll also talk a bit about who is absorbing tariff costs?

We've now had a number of months of tariffs. And is it the consumer? Is it the producer? Is it the retailer? Is it the exchange rate?

So we can start to give some tentative answers to that. We'll also spend a moment on the U.S. Federal Reserve, specifically the pressure on Fed Chair Powell and how that could play out and what that means. We'll also speak about some more thematic fundamental things.

One is we have created a new long-term demographic forecasting model.

And so I'm keen to share with you some of our demographic thoughts that emerge from that. We'll also talk a bit about critical technologies. And really the main takeaway is that the U.S. is in a pretty good position, despite other challenges, as pertains to its technological advantage. So a busy, busy couple of minutes ahead of us.

Let's jump right in. We'll start with tariffs and indeed that August 1st deadline.

Let me emphasize it is a consequential deadline. Tariffs are going up even for countries that have struck trade deals, for the most part.

But equally, I would make the case that the deadline is not as big of a problem or as large of an implication as it was once expected to be.

That is in significant part because we are now up to 31% of trade-weighted trade partners with the U.S. now have deals. So that sort of limits the damage, limits the increase in tariffs. China, another big trading partner has an extension. So it's not seeing any increase on August 1st. It may have another 90 days or so, based on current expectations.

Canada and Mexico don't have deals. And I'll get into some of the nuance of that later.
But maybe the punch line is that the threatened 35% tariff on Canada, the threatened 30% tariff on Mexico only applies to non-USMCA compliant products. And those are a pretty small fraction of the total. So actually the tariff rate isn't necessarily going up much for most products transiting the border.

If you add the trade deal countries, you add China, you add Canada, Mexico - really, all those countries that aren't going to see a radical change, it would appear, in their tariffs or their trading relationship on August 1st - you're actually up to 72% of U.S. imports not seeing a huge jump. So to emphasize, there is still a jump in many cases. The rest of the trading partners may see a larger jump. So August 1st is consequential, but maybe not as big as you might first have thought.

I will mention, and maybe this somewhat undercuts what I've just said, but there are copper tariffs set, in theory at least, to come on August 1st at a 50% rate. The market prices about half of that now. So that does express maybe a bit of skepticism, a bit of thought that perhaps there could be a delay, but we are assuming those do come on.

And just for context, Chile is by far the largest exporter of copper to the U.S.

Canada though, number two and well, well ahead of number three, which is Mexico, well ahead of China and some others as well. And just drilling in on Canada for a moment to give you a bit of a sense of copper, an important industry, certainly, for Canada. Canada exports about half as much copper, on a value basis, as steel to the U.S. So steel’s certainly more important.

Canada exports about a third as much copper as aluminum, again on a on a value basis, to the U.S. So aluminum is king here.

Steel is number two. Copper is substantially behind. Equally, though of course, we don't want that sector to be unnecessarily hit.

So let's pivot to the deals then. So we are getting deals and indeed since we last recorded one of these videos, we have seen a number of deals. Japan and the European Union have both struck trade deals with the U.S. No one much likes them, I guess no one – meaning Europe or Japan or the other countries pending deals with the U.S – is generally all that contented with what they've received.

These would have been considered disappointing trade deals a few months ago. It does make the UK trade deal, which was struck some time ago, look pretty good. It's paying a 10% rate now.

Europe and Japan are paying 15% rates. Just to generalize, I'm sure these countries, these regions are hoping to negotiate better deals at a later date.

But countries are holding their nose. They’re recognizing it's better to pay a 15% rate than to pay 25 or 30% on August 1st, which was the letter that was penned for the European Union and for Japan. And so that's what they've done.

There are some purchase agreements within that in terms of Europe and Japan buying American energy and weapons and things like this. In the European Union’s case, there are a few exemptions, including for pharmaceutical products to a certain point. The EU can perhaps view as a silver lining that it didn't have to scrap its digital services tax.

The EU also didn't lose control of regulating American tech giants on European soil.

And so some wins there, but ultimately a 15% rate is the main headline. Note also that there are a number of trade deals that have now been struck with Southeast Asian economies. Vietnam, Indonesia, the Philippines all coming in at 19 to 20% rates, which is certainly higher than the 15 higher than the UK 10. But it does make sense.

These are countries with massive trade surpluses with the U.S. and with pretty significant labor cost advantages as well, which isn't the case for the UK or Europe or Japan.

In terms of Canada, in the tariff context, it no longer looks as though there will be an August 1st deal. That had been something that had been suggested by both countries, and they are now suggesting it probably won't happen. So that's unfortunate.

The Canadian letter, just to recap, does threaten a 35% tariff. But again, the key thing here is that that only applies to non-USMCA compliant products. Do note that there's already a 25% tariff on those products.

So this is not going from 0 to 35%. It's going from 25 to 35%. It's very confusing to be honest, because in theory, about 40% of what Canada sells to the U.S. is not USMCA compliant. And when we look through the customs data, and we exclude steel, aluminum and autos, which are paying tariffs right now and are a different subject, only about 5% of what Canada sells to the U.S. is actually paying that 25% tariff rate.

And so it's sort of hard to reconcile. It should be 40%. It's only 5%. There are a few little theories swirling, but it's not entirely clear what's happening.

If the current arrangement continues, which is to say, if only 5% of what Canada sells to the U.S. has to pay that new 35% rate instead of a 25% rate, that's not a massive change –
though it's of course unfortunate for the products that are facing it.

There is a risk, though, that theory and reality converge and maybe a bigger share of exports will get hurt over time. We're just not quite sure. So there is a risk there.

If the U.S. and Canada do strike a trade deal and it looks maybe not that likely for August 1st, but one can still hope for that at some later date in the not-too-distant future.

Just don't assume it's the final word on the subject. And that's because these are all sort of handshake deals written on a scrap of napkin, very informal.

The USMCA trade deal, which is the proper, huge document that takes hundreds and thousands of lawyers and so on to hash out, that is set to be formally renegotiated as of July 1st, 2026.

So next summer, and that could be when the U.S. pursues some additional grievances or gets into the more complicated elements, or revisits just what's within the USMCA – which at the moment is, of course, critical, because that component is being excluded from tariffs.

That could be when things like supply management enter the conversation in a more serious way.

And then maybe a last tariff thought, which is just who's absorbing tariff costs?

And so here we are having had tariffs for a number of months, still very preliminary.

The theory would say you could have tariffs accrue to the consumer and higher prices.

It could reduce profit margins of retailers or wholesalers.

It could change the exchange rate. It could affect foreign producers and reduce how much money they're making. And so we can start to say some things.

We certainly can observe that there has been real tariff revenue collected from someone.
125 billion dollars’ worth and rising quickly in the U.S. In the first Trump term, it was mostly the U.S. consumer who ultimately paid that additional price.

We're still expecting a disproportionate share to accrue to the consumer over time.

But we are already seeing some effects in several places, so some is with the consumer. We can see appliances, household furnishings, sporting goods prices, tech product prices have all gone up. That is accruing to the consumer.

We are also interestingly seeing foreign manufacturers see some hit as well. That was less visible last time.

In terms of foreign manufacturers, toys, games, sports equipment, aluminum and steel, the prices they are receiving at the border have gone down somewhat. And so there is a bit of pain accruing there. Not particularly visible in the middle, so U.S. domestic company profit margins, the retailers, the wholesalers, not showing up there that much.

We do have some anecdotes that there is some pain there. General Motors has talked about that and they've lost a billion plus dollars in profit, they claim, on the basis of these tariffs.

But in general, it seems to be in that corporate profit space a little bit less. So we're getting a sense for the distribution. Again, we do think it will accrue more to the consumer over time.

But for the moment it's actually spread somewhat between foreign producers and domestic consumers.

Let's talk about Fed Chair Powell for a moment. First of all, the Fed has a decision imminently as I'm recording this. Probably no rate change. Of course, the White House would like rate cuts. President Trump has talked about 300 basis points of rate cuts that he'd like to see delivered.

I think an objective take on monetary policy would say it's not clear that would be appropriate given that the economy is running at its potential, so it can't run all that much hotter sustainably. Inflation is still too high and there's a threat it goes higher. So it's not an obvious time to deliver stimulative monetary policy.

But of course, the political will is just to maximize short-term economic growth. And so, Powell is being blamed for that mismatch. Doesn't look at this point like he will be removed before his term is up, to our eye, at least.
He does serve as a useful scapegoat in the meantime, in terms of taking the blame for anything bad that could happen to the economy over the span of the next several quarters.

He is scheduled for his chair term to expire naturally in May of next year. It takes a lot to gain political control of the Fed, so that's a concern in markets that perhaps the Fed could be politicized and do suboptimal monetary policy, and you end up with problems down the line.

The Fed chair, do note, is just one vote out of 12. So being able to name the Fed chair which President Trump should be able to do next year, does not mean that therefore he gets to decide monetary policy.

It is technically possible, through a sequence of sort of increasingly unusual steps, that you could see the Fed politicized. And so, to the extent that Trump is in a position to appoint two Fed governors this year, and he appointed two in his last term, and four would then be the majority of the seven Fed governors.

And if you have a majority there, you're allowed to oust the regional presidents, some of whom also vote. So there is a convoluted path by which you could quite extremely politicize the fed. We'd be surprised if it went that far.

I think the lessons from the politicization of the Fed in the ‘70s with Burns was that it's not a desirable outcome. Inflation surges and so on.

And so we do think there's going to be some pressure. We do suspect that the Fed will be at
least a bit more dovish with a new Fed chair in place.

And so, some pivot, but we’re not expecting an extreme shift. We think that would be undesirable.

Let's talk about two thematic things as quickly as I can here. One is we've just created a new demographic model to allow us to do long-term population forecasts.

Historically, we've had to rely on the United Nations work, and they've done very good work.
But we've generally thought that their fertility rate assumptions were too high. And we continue to believe that, even as they revise those downward.

And so we have population forecasts of our own to share. And when we factor those into our forecasts, there are some pretty significant findings here.

For instance, we have the global population peaking now in 2066 rather than the UN and the consensus forecast of 2084. So significantly sooner.

We have the world's peak population reaching 9.6 billion people before it begins to decline, rather than 10.3 billion, which is the UN forecast. And if that's correct, and we'll see if it is (I may not be working professionally at the time!) but if correct, there are implications.

One would be you would expect economic growth to be at least slightly slower than otherwise; a 10th or 2/10th slower, than it would otherwise be.

You would expect commodity prices to be a bit lower as opposed to higher due to lower demand.

We think it means that interest rates should be maybe 10 or 20 basis points lower than in the UN forecast scenario.

Inflation, we believe, should run a little bit cooler as well. And the fiscal environment is potentially more challenging because you have a worse dependency ratio. More old people, fewer working-age people, higher fiscal obligations in terms of pensions and so on.

And so we'll see how this plays out. I will just say demographics are one of the more reliable inputs into long-term economic forecasting. And we think it may be a little bit less friendly than commonly imagined.

Let me finish with critical technologies. Recent research from Harvard into key technologies, five key technologies, looks at which countries are leading the way and have a particular advantage in those spaces.

Maybe I'll preface that by saying the general thesis in recent months has been that U.S. economic exceptionalism is shrinking. I think that's for reasonably good reasons:
some suboptimal economic policy, political partisanship, difficult fiscal environment, a loss of international trust, the rise of China, other countries awakening.

It is fair to say that the U.S. economy probably will be somewhat less exceptional in the future than it has been in recent years. I think equally, and that's the point of this, we shouldn't rule the U.S. out altogether.

It's still a very dynamic place. It has falling taxes. It has amazing companies. And indeed, when you look at critical technologies – artificial intelligence, computer chips, biotechnology, space and quantum fields – in all five cases, the answer is the U.S. is leading.

I should say in all cases China is in number two. And China is pretty close in biotech in particular, and not too, too far behind in quantum technologies and computer chips. But the U.S. has a substantial lead in AI, a substantial lead in space exploration. Ultimately a lead in all five.

You look at other parts of the world, Europe as an example. Europe is substantially behind China, let alone the U.S.

The point here is that the U.S. is still pretty well positioned to capitalize on what could be the major technologies of the next several decades. So don't write the country off. It is set potentially to still enjoy pretty good productivity growth, pretty good innovation growth. It may be somewhat less exceptional than before, but there are still absolutely some exceptional components.

Okay, I'll stop there. Thanks so much for your time. I hope you found that useful and interesting. And please tune in again next time.