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00:00Lizzie, a pleasure to have you on the program this morning. There's some mixed thoughts about what the implications specifically for Europe, positively for the markets might actually be. Walk us through your take. What is your biggest risk that you're viewing out of the United States? I think, broadly speaking, where we're seeing Biden represents a continuity in the U.S. relationship, whereas Trump does pose potentially some bigger risks for Europe. That's probably two fold. One, you probably have a bigger risk that there is a substantial change to the defense commitments that the US holds with Europe. And so particularly around things like play an active role in NATO's support for Ukraine. The other is around this tariffs point. So Trump has proposed a 10% baseline tariff on all US imports. But we also know that in his first term he did he did other things as well. And so the steel and aluminum tariffs date back to Europe. He also at some point thought about introducing additional tariffs on autos as well. So there are other potential risks, even if Trump doesn't go down the route of introducing a universal tariffs that are worth keeping an eye on. Ozy What does the reciprocity of that actually look like? It feels like every time this is indicated that President Trump or even President Biden, who's kept a lot of the tariffs in place during his during his presidency, what does the European response look like? We last time we saw Europe try a slightly asymmetric approach where they did increase tariffs on some goods, but they weren't, you know, like a like for like some introducing tariffs on on very popular consumer items that were so popular in the US markets, for example, to try and really emphasize to U.S. consumers that during the negative implications of this sort of tariff based approach to trade, we didn't really see that have a particularly big impact on the way Trump thought about tariffs in his first term. So I would I expect some reciprocity. Yes. Would I imagine it would be enough to fundamentally alter Trump's approach? No. We do see him take quite a transactional approach to trade on occasion. So I think he will be looking for for concessions to be made in exchange for altering or lowering tariffs rather than trying to get necessarily getting what it wants through an increase in its own tariffs. Lizzy, I'm trying to make this more stock specific in terms of the impact that we could be looking at. Do you think it would be once again the luxury sector that maybe falls under the spotlight? Do I need to be thinking about LVMH or some of the spirits companies that could come under pressure? You talk about the defense story. Would Europe increase defense spending? Would I be buying European defense stocks on the back of a Trump win? Can you just be a bit more granular in terms of where you think the thinking is right now? Or do we just simply not know what would happen and which sectors could be targeted? I think it's kind of difficult to know. I mean, Trump is an incredibly unpredictable politician. That's one of the big risks with his style of leadership that you just you just don't quite know until he actually commits to to a policy. But we do have indications from his first term, and I think that does offer a good baseline. So I think Europe's response could well be fairly similar in that they they may choose to to look at things like the luxury sector again, that equally Trump may also focus on areas that he did in his first term. So I would say that a return of the steel tariffs, for example, which would be an obvious place to look and I think on defence it's actually quite difficult to see a real response sort of growing from and on the European side. They've been talking about raising defence budgets really since the invasion of Ukraine and we've seen that actually be very slow to really actually turn into any meaningful change. So they may want to do this, they may want to insulate against the risk, but actually putting that into reality in an era of far more constrained fiscal landscapes across Europe is really quite difficult. Lizzie, what would Biden's industrial policy look like if we were to get a second term? Would we see something akin to the Inflation Reduction Act? Industrial policy in the states has changed significantly. You could argue significantly to the detriment of Europe and has driven the US economy. And I'm wondering whether or not that policy just simply continues and that kind of America first industrial policy continues to disadvantage Europe. I think we definitely see Biden want to protect the Inflation Reduction Act as much as possible. One thing that we are expecting from this US election is that we think it is extremely likely the Republicans retake Senate. And in that environment, even if Biden were to retain the presidency, it will be very difficult for him to expand his industrial policy in any significant way. But he would certainly try to protect tax cuts as much as possible. And we'd also see Biden continue to try and, you know, go further with his frame showing agenda, for example, in critical minerals. But I think we're still we will still probably see Europe struggle to, for example, get a critical minerals deal with the US that would help lessen the impact of the Inflation Reduction Act on European autos. We've not seen too much progress in that area in Biden's first term, and it's not clear that would change in a second. Yeah, it does seem as if there is some disappointment in European political circles about what's been achieved under a Biden administration. Lizzie. But but fear for the future, perhaps in terms of the US election and how it rubs up against all the political events thinking here in the UK, of course, about the UK election, that does seem to be quite a lot of thought being given to the timing of these two things, because if they were to fall quite close to each other, we've had some reporting that suggests there are some security bodies that are that are concerned about these two these two political groups taking their eye off the international stage. Lizzie, what are you hearing on that front? So our expectation is still that the UK election is most likely to be called in a race October two to mid November, and that does obviously put it extremely close to the US election on November. Security angle is obviously a concern and that does mean that an election in May, coinciding with the local elections is still very much on the table. But our understanding is that isn't the preferred option, primarily because of the significant polling deficit that we see the Conservative government facing at the moment. And they would like as much time as possible to try and close that gap doesn't change our outlook for the election outcome itself. We're still expecting a Labour Party government at the end of this. But yes, yes, I think the security issue is a factor, but not necessarily the defining one. Yeah. Lizzie, given the outlook they'll seek. Well, the poll certainly suggests that the Labour Party could get a substantial majority when the election comes around. I was drawn to one of the lines in your notes because I was thinking, Well, well, if that's the case, how much should we focus on the budget in the UK next week? Maybe the markets have a much, you know, plenty of other things to think about, that's for sure. But then you said in your notes today that if we see next week tax cuts delivered, funded, sorry, with further spending cuts towards the end of the forecast horizon, then the waste that risks creating credibility concerns. And in the UK context, given what we've seen in the last couple of years, that sounds risky. How much of a risk is that? So I think it is significantly smaller than anything that we saw in the aftermath of the testimony by today. I'm not suggesting that it would be in any way on that scale. The government has certainly learned a lot from from that episode. But I think there are still a lot of the we saw a lot of criticism in the witness statement when when the government this when they funded the tax cuts that we saw with some fairly unclear but quite substantial spending cuts at the end of the forecast horizon. Now, that generated quite a lot of criticism at the time. And I think if that were to be repeated again, then that just compounds the issue further and it creates even more questions over the viability and sustainability of this approach to budgets. And it's something that is a is a problem now for this government, but it's also a problem with the next government will inherit because they will they will have to deal with these forecasts and they will have to attempt to introduce the policies that they want to in a very, very constrained future fiscal environment.

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Risks to US-EU Defense Commitments, Tariffs: Abrdn's Galbraith

Lizzy Galbraith, Abrdn Political Economist sees a Trump administration posing risks to US defense commitments and potential tariffs on Europe. She speaks to Bloomberg's Kriti Gupta on "Bloomberg Markets Today." (Interview occurred on March 1, 2024) (Source: Bloomberg)