Charts of the Week | Tariffs, Tensions, and Trade-Offs

This week’s flash PMI surveys from the US, Europe and Japan contained mixed evidence about the current plight of the world economy. The US economy maintained some decent momentum in March at the same time as Europe’s growth rate has picked up pace. Japan in contrast saw some marked weakening in its headline composite PMI, suggesting a big loss of momentum. Away from the headline messages, however, it was the underlying details that were of more interest. As chart 1 below suggests US factories reported the steepest rise in input costs for 31 months, causing the rate of inflation to far outpace equivalent rates reported in the other G4 economies. Producers commonly blamed these higher prices on tariffs.

A broader concern that stems from US tariff policies is the disruption they might invoke for global supply chains. Still, the evidence for this so far is patchy. The New York Fed’s global supply chain pressure index, for example, remained close to “normal” levels in February. This week’s inflation data from the UK additionally showed no evidence yet to suggest that pipeline price pressures in the goods sector are beginning to stoke inflation (chart 2).

A broader, longer-term concern among investors is the willingness of overseas capital to remain in US asset markets amid rising trade tensions and reduced global cooperation. A sustained deterioration in international economic ties could trigger an outflow of foreign capital from US markets, undermining elevated valuations and putting significant downward pressure on the US dollar. However, the extent of any capital flight will depend not only on investors’ willingness to exit US markets but also on the attractiveness of alternative destinations. As chart 3 highlights, the steady appreciation of the real value of the US dollar in recent years—driven in large part by robust foreign demand for US financial assets—has coincided with a period of US economic outperformance. With US growth concerns mounting and policy uncertainty increasing, the narrative of American economic superiority is being increasingly questioned. But if confidence in US markets erodes while viable alternatives in Europe or China fail to materialize, capital reallocations may be more gradual.

Indeed, as we have emphasized in this publication before, the outperformance of the US economy relative to other advanced economies is underpinned by several structural advantages that are unlikely to fade anytime soon. One of the most significant is the US’s energy advantage. As highlighted in Chart 4, domestic electricity prices in the US remain substantially lower than in other major economies, with the UK, France, and Germany facing significantly higher costs. This energy cost disparity continues to provide US industries with a competitive edge, supporting manufacturing, investment, and overall economic resilience at a time when Europe’s growth prospects remain constrained by elevated energy expenses.

Amid ongoing US-China trade tensions and shifting global capital flows, China’s currency dynamics remain a key focus. While the yuan has depreciated in real terms since early 2022—partly due to external exchange rate and inflation trends—its role in trade competitiveness is evolving. Historically, a weaker yuan supported China’s export-led growth model, benefiting global firms sourcing inputs from China. However, as China has moved up the value chain in high-end manufacturing, currency-driven trade advantages are becoming more contentious. With China now competing more directly with advanced economies in finished goods, further depreciation could invite greater scrutiny—particularly from the US, where protectionist sentiment is already high.