The approach towards mergers remains the most controversial area of competition policy. Some argue that policy makers in both the UK and EU have been too easily persuaded by the arguments put forward by firms and so have allowed too many mergers to proceed. Others claim that the opposite is true and that merger policy has prohibited mergers that should have been allowed to proceed. This, then, has a negative impact on investment, innovation, productivity and growth.
In recent years there has been more specific criticism of merger policy in the UK. The government has indicated that it wants the Competition and Markets Authority (CMA) to be less interventionist and take a more pro-growth approach.
In February 2025, in response to this criticism, the CMA launched its new ‘4 Ps’ approach to merger policy: Pace, Predictability, Proportionality and Process. Various changes to the investigation process have been proposed in the past 12 months using this framework.
Pace. The time taken by the CMA to initially assess a merger before deciding whether a Phase 1 investigation is necessary (i.e. the pre-notification procedure) was reduced from 65 to 40 working days. Also, the target to complete straightforward Phase 1 investigations was reduced from 35 to 25 days.
Predictability. The proposed merger guidelines, published in October 2025, provide more detail on (a) what criteria will be used to measure market shares when applying the ‘share of supply test’ (this is where the combined UK market share of two merging businesses is at least 25%, provided one business has a UK turnover of at least £10 million), and (b) the factors that are likely to lead to the competition authorities concluding that one business has gained ‘material influence over another’. Businesses had complained that there was too much uncertainty about the way the share of supply test and material influence were applied. The CMA is also considering greater alignment with other international regulators over decision making rather than its previous policy of acting independently. All these measures should increase the predictability of the investigation process.
Proportionality. Proportionality refers to the objective of addressing any competition issues in merger cases in a way that places the minimum burden on the businesses involved. To improve proportionality, the CMA has indicated that in future cases it will be more willing to use behavioural remedies – requiring firms to take or desist from certain actions. New draft guidelines identify more situations where the use of behavioural remedies may be appropriate. However, they also show that the CMA still views structural remedies (e.g. preventing the merger or requiring firms to demerge or to sell certain assets) as more effective in many situations. Another important measure to improve proportionality is the introduction of a new ‘wait and see’ approach to global mergers. The CMA will now wait to see if the actions taken by other competition authorities in global cases address any concerns in the UK market before deciding whether to launch a review.
Process. To improve the process, the CMA has announced plans to engage with businesses at a much earlier point in the process. For example, it has pledged to share its provisional thinking in the early stages of an investigation by implementing new ‘teach-in’ sessions and having more regular update meetings. Much earlier meetings that focus on possible remedies will also take place. This may make it possible for the CMA to assess the suitability of more complex remedies during a Phase 1 investigation rather than having to wait for a longer and more costly Phase 2 review. Phase 2 reviews will also no longer be managed by panels of independent experts. This role will now be carried out by the internal CMA board.
Some critics argue that the CMA has not fully considered the potential benefits of mergers in many cases. For example, a merger could (a) have procompetitive effects, known as rivalry enhancing efficiencies (REEs) and/or (b) benefits for consumers outside of the relevant market, known as relevant customer benefits (RCBs). In response to this criticism, the CMA is currently reassessing its approach to including evidence on REEs and RCBs.
The CMA is still currently consulting with interested parties about many of these proposed changes. It will be interesting to see what final decisions are made in the next couple of years.
Articles
- CMA consults on proposed changes to its merger remedies approach
CMA Press Release (15/10/25)
- New CMA proposals to drive growth, investment and business confidence
CMA Blog, Sarah Cardell (CMA Chief Executive) (13/2/25)
- Promoting competition and protecting consumers to drive growth and improve household prosperity
CMA Speech, Sarah Cardell (20/11/25)
- Steering the course: how the CMA is responding to the Government’s pro-growth agenda
Macfarlanes (21/2/25)
- 4Ps and 3 themes – An overview of the CMA’s merger remedies review
Hogan Lovells, Angus Coulter, Alice Wallace-Wright, Karman Gordon, and Denise Hotham-Kellner (1/4/25)
- CMA publishes updated guidance on UK merger procedure
Ashurst, Christopher Eberhardt, Emile Abdul-Wahab and Finlay Sadler-Wilson (11/11/25)
- Government ousts UK competition watchdog chair
BBC News, Simon Jack and Charlotte Edwards (21/1/25)
- UK competition watchdog drops Microsoft-OpenAI probe
BBC News, Imran Rahman-Jones (5/3/25)
- Does the government really know what it wants from the CMA?
The Guardian, Nils Pratley (13/2/25)
- This article is more than 9 months old ‘We must avoid a chilling effect’: the CMA chief on the UK’s pro-growth shift
The Guardian, John Collingridge (18/2/25)
- The CMA should be nudged on antitrust, not bullied
The Financial Times, John Gapper (6/2/25)
CMA documentation
Questions
- Of all the mergers considered by the CMA in 2024/25, find out what percentage were formally investigated. How many were blocked from taking place? Do you believe that this indicates that merger policy is too weak or too strong?
- What three criteria must be met for a business arrangement to be classed as a ‘relevant merger situation’ by the CMA?
- Identify some different methods that one business could use to gain material influence over the way another company operates.
- Outline the ‘turnover test’, the ‘share of supply test’ and the ‘hybrid test’.
- Discuss the potential advantages of using behavioural remedies as opposed to structural remedies in merger cases. Why has the CMA still preferred the use of structural remedies in most situations?
The share prices of various AI-related companies have soared in this past year. Recently, however, they have fallen – in some cases dramatically. Is this a classic case of a bubble that is bursting, or at least deflating?
Take the case of NVIDIA, the world’s most valuable company, with a market capitalisation of around $4.2 trillion (at current share prices). It designs and produces graphics cards and is a major player in AI. From a low of $86.62 April this year, its share price rose to a peak of $212.19 on 29 October. But then began falling as talk grew of an AI bubble. Despite news on 19 November that its 2025 Q3 earnings were up 62% to $57.0bn, beating estimates by 4%, its share price, after a temporary rise, began falling again. By 21 November, it was trading at around $180.
Other AI-related stocks have seen much bigger rises and falls. One of the biggest requirements for an AI revolution is data processing, which uses huge amounts of electricity. Massive data centres are being set up around the world. Several AI-related companies have been building such data centres. Some were initially focused largely on ‘mining’ bitcoin and other cryptocurrencies (see the blog, Trump and the market for crypto). But many are now changing focus to providing processing power for AI.
Take the case of the Canadian company, Bitfarms Ltd. As it says on its site: ‘With access to multiple energy sources and strategic locations, our U.S. data centers support both mining and high-performance computing growth opportunities’. Bitfarms’ share price was around CAD1.78 in early August this year. By 15 October, it had reached CAD9.27 – a 421% increase. It then began falling and by 24 November was CAD3.42 – a decline of over 63%.
Data centres do have huge profit potential as the demand for AI increases. Many analysts are arguing that the current share price of data centres undervalues their potential. But current profits of such companies are still relatively low, or they are currently loss making. This then raises the question of how much the demand for shares, and hence their price, depends on current profits or future potential. And a lot here depends on sentiment.
If people are optimistic, they will buy and this will lead to speculation that drives up the share price. If sentiment then turns and people believe that the share price is overvalued, with future profits too uncertain or less than previously thought, or if they simply believe that the share price has overshot the value that reflects a realistic profit potential, they will sell and this will lead to speculation that drives down the share price
The dot.com bubble of the late 1990s/early 2000s is a case in point. There was a stock market bubble from roughly 1995 to 2001, where speculative investment in internet-based companies caused their stock values to surge, peaking in late 1999/early 2000. There was then a dramatic crash. But then years later, many of these companies’ share prices had risen well above their peak in 2000.
Take the case of Amazon. In June 1997, its share price was $0.08. By mid-December 1999, it had reached $5.65. It then fell, bottoming out at $0.30 in September 2001. The dot-com bubble had burst.
But the potential foreseen in many of these new internet companies was not wrong. After 2001, Amazon’s share price began rising once more. Today, Amazon’s shares are trading at over $200 – the precise value again being driven largely by the company’s performance and potential and by sentiment.
So is the boom in AI-related stock a bubble? Given that the demand for AI is likely to continue growing rapidly, it is likely that the share price of companies providing components and infrastructure for AI is likely to continue growing in the long term. But just how far their share prices will fall in the short term is hard to call. Sentiment is a fickle thing.
Articles
Questions
- Using a supply and demand diagram, illustrate how speculation can drive up the share price of a company and then result in it falling.
- What is meant by overshooting in a market? What is the role of speculation in this process?
- Does a rapid rise in the price of an asset always indicate a bubble? Explain.
- What are the arguments for suggesting that markets are/are not experiencing an AI share price bubble? Does it depend of what part of the AI market is being considered?
- What is meant by the market capitalisation of a company? Is it a good basis for deciding whether or not a company’s share price is a true reflection of the company’s worth? What other information would you require?
- Find out what has been happening to the price of Bitcoin. What factors determine the price of Bitcoin? Do these factors make the price inherently unstable?
Every year, world leaders gather to find ways of limiting global warming. The latest of these ‘COP’ meetings, COP30, is in Belém, Brazil from 10 to 20 November 2025. COP stands for ‘Conference of the Parties’, the decision-making body of the United Nations Framework Convention on Climate Change (UNFCCC).
Perhaps the best-known of these meetings was in Paris in 2015. This resulted in the Paris Agreement. This is a legally-binding international treaty to limit global warming to well below 2°C and preferably to 1.5°C above pre-industrial levels. This would involve reducing greenhouse gas emissions and/or taking carbon absorbing measures. All UN countries except for Iran, Libya and Yemen are signatories to the agreement.
However, on coming to office in January 2025, President Trump announced that the USA will withdraw from the agreement in January 2026. Instead, he would prioritise fossil fuel production, under the mantra, ‘drill, baby, drill’. Previously he had claimed that global warming is a hoax concocted by China designed to undermine the competitive power of the USA.
Progress in reducing emissions and mitigating climate change
Since 2020, each country has been required to submit its own emissions-reduction targets, known as ‘nationally determined contributions’ (NDCs), and the actions it will take to meet them. Every five years each country must submit a new NDC more ambitious than the last. New NDCs are due this year. As of 12 November, 112 of the 197 countries had submitted a new NDC (including the USA, China, the EU and the UK). These 112 countries account for around 71 per cent of global emissions.
Implementing all new NDCs would reduce global CO2 emissions by between 15 and 25 per cent from current levels by 2035. But this would merely reduce global warming to around 2.6°C above pre-industrial levels. Approximately 35 per cent emissions reductions by 2035 would be required to restrict global warming to 2°C and 55 per cent to restrict it to 1.5°C.
But implementing the Paris Agreement has still had a high degree of success. Without the action taken and being taken over the past 10 years, it is predicted that global temperatures by 2050 would rise by 3–3.5°C.
Rich countries are expected to provide finance to low-income countries. This is required to help such countries adopt green technologies and to adapt to the harmful effects of climate change (e.g. through irrigation schemes and flood defences). At COP29 in Azerbaijan, the ‘Baku Finance Goal’ was agreed. This is an agreement to provide climate finance of $1.3 trillion per year by 2035 to developing countries from all public and private sources.
The subsequent ‘Baku to Belém Roadmap’ provides a set of suggested actions for governments, financial institutions and the private sector to bridge the gap between current climate finance flows and the $1.3 trillion agreed to meet global climate goals. The roadmap is a central focus of the COP30 conference in Belém, with discussions between countries on how to translate the Baku finance goal into concrete, tangible actions and integrate it into formal decisions.
The role of Donald Trump
As well as announcing that the USA will withdraw from the Paris Agreement in January 2026, since coming to office in 2025, President Trump has given billions of dollars of tax cuts to fossil fuel firms and allowed drilling for oil and gas on federal lands. At the same time, he has described renewable energy as ‘a joke’ that will bankrupt countries and has slashed subsidies and tax breaks for solar and wind power, withdrawn permits for wind and solar farms, and cut funding for green energy research.
He wants the USA to be world leader in fossil fuel energy, calling on governments to buy US oil and gas, threatening some countries with tariffs if they do not. Already, Japan, South Korea and several European countries have agreed to buy huge quantities of US oil and liquefied natural gas (LNG). A worry is that other similarly inclined governments, such as Argentina, may roll back on their commitments to a green transition and instead boost their fossil fuel industries.
This gives added urgency to the Belém talks. It is crucial for the rest of the world to stick together in pushing ahead to combat global warming and in adopting and sticking to tough NDCs. It is also crucial for rich countries to support dlow-income countries in adopting climate-friendly investment and in measures to mitigate the effects of global warming.
The economics of climate change
Climate change is directly caused by market failures. One of the most important of these is that the atmosphere is a common resource: it is not privately owned; it is a global ‘commons’. Individuals and firms use it at a zero price. If the price of any good or service to the user is zero, there is no incentive to economise on its use. Thus for the emitter there are no private costs of using the atmosphere in this way as a ‘dump’ for their emissions and, in a free market, no incentive to reduce the climate costs.
And yet when firms emit greenhouse gases into the atmosphere there are costs to other people. To the extent that they contribute to global warming, part of these costs will be borne by the residents of that country; but a large part will be borne by inhabitants of other countries.
These climate costs are external costs to the firm and are illustrated in the figure. It shows an industry that emits CO2. To keep the analysis simple, assume that it is a perfectly competitive industry with demand and supply given by curves D and S, which are equal to the marginal private benefits (MPB) and marginal private costs (MPC), respectively. There are no externalities on the demand side and hence MPB equals the marginal social cost (MSB). Market equilibrium is at point a, with output at Qpc and price at Ppc. (Click here for a PowerPoint.)
Assume that the emissions create a marginal cost to society equal to MECc. Assume that the MEC increases as output and total emissions increase. The MECc line is thus upward sloping. At the market price of Qpc, these external climate costs are equal to the purple vertical line. When these external climate costs are added to private costs, this gives a marginal social cost given by MSC = MPC + MECc. The gives a socially optimal level of output of the product of Q* at a price of P*, with the optimum point of c.
In other words, other things being equal, the free market overproduces products with climate externalities. If the output is to be reduced to the social optimum of Q*, then the government will need to take measures such as those advocated in the Paris Agreement. These could include imposing taxes on products, such as electricity generated by fossil fuels, or on the emissions themselves. Or green alternatives, such as wind power, could be subsidised.
Alternatively, regulations could be used to cap the production of products creating emissions, or caps on the emissions themselves could be imposed. Emissions permits could be issued or auctioned. Only firms in possession of the permits would be allowed to emit and the permits would cap emissions below free-market levels. These permits could be traded under a cap-and-trade scheme, such as the EU’s Emissions Trading Scheme. Again, such schemes are advocated under the Paris Agreement.
COP30 and progress in tackling climate change
The USA is not attending COP30 in Brazil. Nor is the Chinese leader, Xi Jinping. However, there are growing opportunities for translating aims into practical policies for specific sectors, such as energy, transport and carbon-intensive industries. These policies may require some degree of government action – taxes, subsidies or regulation – to internalise climate externalities. But increasingly, green alternatives are becoming economically viable without subsidies or with just initial government funding to ‘crowd in’ private investment, which will then attract further private capital as external economies of scale kick in. Increasingly investors will find profitable opportunities in climate-friendly projects.
At the same time, while the USA is moving away from climate-friendly investment (as least for the term of the Trump Presidency), China is moving in the opposite direction, with massive investment in solar panels, wind turbines, EVs and batteries – investment that is bringing down their cost and thereby encouraging their adoption around the world. Such technologies create huge opportunities for low-income countries to provide affordable energy and to create local jobs, both skilled and unskilled. It also helps them achieve much greater energy security by reducing their reliance on fossil fuel imports
Chinese advances in green technology are also providing a stimulus to other countries to invest in renewable industries to prevent Chinese dominance. The danger, however, of Chinese dominance in the renewable sector in high-income countries is that it may encourage them to impose tariffs on Chinese imports of EVs, solar panels, etc. to protect their own industries.
But despite the growing opportunities for profitable adoption of green technologies without government support, there is still much that governments need to do to encourage the process. COP meetings are an important forum for discussing such policies and holding governments to account for meeting or not meeting their targets.
The agreement
The agreement reached at the end of the conference marked relatively small progress. There was agreement to increase finance from developed to developing countries to help them adapt to climate change. This would triple to $120bn per year, up from the previously agreed doubling, but the target date was pushed back to 2035 from the previously agreed 2030.
By the end of the conference, 122 of the 197 countries had submitted a new NDC – still 75 countries short, although others are expected.
The conference also agreed to establish a ‘just transition mechanism (JTM)’ to ‘enhance international cooperation, technical assistance, capacity-building and knowledge-sharing, and enable equitable, inclusive just transitions’. However, this is voluntary and no funding was attached, but it could act as the basis for future funding.
The biggest failure of the conference was probably the lack of agreement on phasing out of fossil fuels. This is not surprising given the opposition of the major oil producers. The hope is that the reduction in costs of renewable energy will drive the process anyway – a process that China is keen to accelerate with its investment in solar power and other renewable energy. One hopeful development, however, was the pledging of more than $9bn to halt deforestation, a major source of global warming. (See the Travers Smith article at the end of the Articles list below for a very useful summary of the outcome.)
Articles
- What is COP30 and why does it matter for the climate?
Chatham House, Anna Åberg (5/9/25)
- COP30 in Brazil: What is at stake for global collaboration on climate and nature?
World Economic Forum, Pim Valdre (5/11/25)
- What is COP30 and why does it matter?
CNN, Laura Paddison (11/11/25)
- Why COP 30 in Brazil Matters for a Thriving Economy and a Safe, Livable Planet
Union of Concerned Scientists (UCS),Rachel Cleetus (7/11/25)
- Nationally Determined Contributions: The Action Plans Behind Global Efforts To Fight the Climate Crisis
Center for American Progress (CAP, Kalina Gibson and Courtney Federico (22/9/25)
- New climate pledges only slightly lower dangerous global warming projections
UN Environment Programme, Press Release (4/11/25)
- COP30: Trump and many leaders are skipping it, so does the summit still have a point?
BBC News, Justin Rowlatt (10/11/25)
- Trump dismisses clean energy as ‘a joke.’ But Americans deserve facts, not fear
USA Today, Mark McNees (23/9/25)
- The surprising countries pulling off stunningly fast clean energy transitions
CNN, Ella Nilsen and Samuel Hart (7/11/25)
Could the world’s biggest polluter be its savior against climate change?CNN, Simone McCarthy (17/11/25)
- COP 2025: Outlook and Implications for Investors
RankiaPro, Joanna Piwko, Allegra Ianiri, Marie Lassegnore and Jean-Philippe Desmartin (10/11/25)
Post-agreement
- Belém: yet another cop out
Zero Hour, Allan Gray (25/11/25)
- Cop30’s watered-down agreements will do little for an ecosystem at tipping point
The Guardian, Fiona Harvey, Jonathan Watts, Damien Gayle and Damian Carrington (22/11/25)
- COP30: Five key takeaways from a deeply divisive climate summit
BBC News, Justin Rowlatt and Matt McGrath, (25/11/25)
- COP30: What were the key outcomes?
Travers Smith (1/12/25)
Information and Data
Questions
- Summarise the Paris Agreement.
- Summarise the Baku to Belém Roadmap to 1.3T.
- What incentives are there for countries to stick to their NCDs?
- Using a diagram similar to that above, illustrate how the free market will produce a sub-optimal amount of solar power because the marginal social benefit exceeds the marginal private benefit. How might the calculation be changing?
- How might game theory be used to analyse possible international decision making at COP conferences? How might this be affected by the attitudes of the Trump administration?
- Is it in America’s interests to cease investing in green energy and green production methods?
In a blog in October 2024, we looked at global uncertainty and how it can be captured in a World Uncertainty Index. The blog stated that ‘We continue to live through incredibly turbulent times. In the past decade or so we have experienced a global financial crisis, a global health emergency, seen the UK’s departure from the European Union, and witnessed increasing levels of geopolitical tension and conflict’.
Since then, Donald Trump has been elected for a second term and has introduced sweeping tariffs. What is more, the tariffs announced on so-called ‘Liberation Day‘ have not remained fixed, but have fluctuated with negotiations and threatened retaliation. The resulting uncertainty makes it very hard for businesses to plan and many have been unwilling to commit to investment decisions. The uncertainty has been compounded by geopolitical events, such as the continuing war in Ukraine, the war in Gaza and the June 13 Israeli attack on Iran.
The World Uncertainty Index (WUI) tracks uncertainty around the world by applying a form of text mining known as ‘term frequency’ to the country reports produced by the Economist Intelligence Unit (EIU). The words searched for are ‘uncertain’, ‘uncertainty’ and ‘uncertainties’ and the number of times they occur as percentage of the total words is recorded. To produce the WUI this figure is then multiplied by 1m. A higher WUI number indicates a greater level of uncertainty.
The monthly global average WUI is shown in Chart 1 (click here for a PowerPoint). It is based on 71 countries. Since 2008 the WUI has averaged a little over 23 000: i.e. 2.3 per cent of the text in EIU reports contains the word ‘uncertainty’ or a close variant. In May 2025, it was almost 79 000 – the highest since the index was first complied in 2008. The previous highest was in March 2020, at the start of the COVID-19 outbreak, when the index rose to just over 56 000.
The second chart shows the World Trade Uncertainty Index (WTUI), published on the same site as the WUI (click here for a PowerPoint). The method adopted in its construction therefore mirrors that for the WUI but counts the number of times in EIU country reports ‘uncertainty’ is mentioned within proximity to a word related to trade, such as ‘protectionism’, ‘NAFTA’, ‘tariff’, ‘trade’, ‘UNCTAD’ or ‘WTO.’
The chart shows that in May 2025, the WTUI had risen to just over 23 000 – the second highest since December 2019, when President Trump imposed a new round of tariffs on Chinese imports and announced that he would restore steel tariffs on Brazil and Argentina. Since 2008, the WTUI has averaged just 2228.
It remains to be seen whether more stability in trade relations and geopolitics will allow WUI and WUTI to decline once more, or whether greater instability will simply lead to greater uncertainty, with damaging consequences for investment and also for consumption and employment.
Articles
- IMF World Economic Outlook: economic uncertainty is now higher than it ever was during COVID
The Conversation, Sergi Basco (23/4/25)
- Economic uncertainty hits new high
McKinsey, Sven Smit et al. (29/5/25)
- Trade tensions and rising uncertainty drag global economy towards recession
UNCTAD News (25/4/25)
- IMF Warns Global Economic Uncertainty Surpasses Pandemic Levels
The Global Treasurer (24/4/25)
- Britons ‘hoarding cash amid economic uncertainty and fear of outages’
The Guardian, Phillip Inman (10/6/25)
- America’s Brexit Phase
Foreign Affairs, Jonathan Haskel and Matthew J. Slaughter (10/6/25)
- Goldman Sachs’ CEO on the ‘Big, Beautiful Bill,’ Trump’s Tariffs and Economic Volatility
Politico, Sam Sutton (13/6/25)
- The Countries Where Economic Uncertainty Is Rising Fastest
24/7 Wall St., Evan Comen (9/6/25)
- Trump’s tariffs have finally kicked in, so what happens next?
The Conversation, Maha Rafi Atal (8/8/25)
Uncertainty Indices
Questions
- Explain what is meant by ‘text mining’. What are its strengths and weaknesses in assessing business, consumer and trade uncertainty?
- Explain how the UK Monthly EPU Index is derived.
- Why has uncertainty increased so dramatically since the start of 2025?
- Compare indices based on text mining with confidence indices.
- Plot consumer and business/industry confidence indicators for the past 24 months, using EC data. Do they correspond with the WUI?
- How may uncertainty affect consumers’ decisions?
Economic growth is closely linked to investment. In the short term, there is a demand-side effect: higher investment, by increasing aggregate demand, creates a multiplier effect. GDP rises and unemployment falls. Over the longer term, higher net investment causes a supply-side effect: industrial capacity and potential output rise. This will be from both the greater quantity of capital and, if new investment incorporates superior technology, from a greater productivity of capital.
One of the biggest determinants of investment is certainty about the future: certainty allows businesses to plan investment. Uncertainty, by contrast, is likely to dampen investment. Investment is for future output and if the future is unknown, why undertake costly investment? After all, the cost of investment is generally recouped over several months or year, not immediately. Uncertainty thus increases the risks of investment.
There is currently great uncertainty in the USA and its trading partners. The frequent changes in policy by President Trump are causing a fall in confidence and consequently a fall in investment. The past few weeks have seen large cuts in US government expenditure as his administration seeks to dismantle the current structure of government. The businesses supplying federal agencies thus face great uncertainty about future contracts. Laid-off workers will be forced to cut their spending, which will have knock-on effect on business, who will cut employment and investment as the multiplier and accelerator work through.
There are also worries that the economic chaos caused by President Trump’s frequent policy changes will cause inflation to rise. Higher inflation will prompt the Federal Reserve to raise interest rates. This, in turn, will increase the cost of borrowing for investment.
Tariff uncertainty
Perhaps the biggest uncertainty for business concerns the imposition of tariffs. Many US businesses rely on imports of raw materials, components, equipment, etc. Imposing tariffs on imports raises business costs. But this will vary from firm to firm, depending on the proportion of their inputs that are imported. And even when the inputs are from other US companies, those companies may rely on imports and thus be forced to raise prices to their customers. And if, in retaliation, other countries impose tariffs on US goods, this will affect US exporters and discourage them from investing.
For many multinational companies, whether based in the USA or elsewhere, supply chains involve many countries. New tariffs will force them to rethink which suppliers to use and where to locate production. The resulting uncertainty can cause them to delay or cancel investments.
Uncertainty has also been caused by the frequent changes in the planned level of tariffs. With the Trump administration using tariffs as a threat to get trading partners to change policy, the threatened tariff rates have varied depending on how trading partners have responded. There has also been uncertainty on just how the tariff policy will be implemented, making it more difficult for businesses to estimate the effect on them.
Then there are serious issues for the longer term. Other countries will be less willing to sign trade deals with the USA if they will not be honoured. Countries may increasingly look to diverting trade from the USA to other countries.
Video
Articles
- Trump’s erratic trade policies are baffling businesses, threatening investment and economic growth
Associated Press, Paul Wiseman, Anne D’innocenzio and Mae Anderson (6/3/25)
- The world is beginning to tire of Trump’s whiplash leadership
CNN, Stephen Collinson (6/3/25)
- US stocks slide and Nasdaq enters correction as chaos over Trump’s tariffs intensifies
CNN, John Towfighi (6/3/25)
- Trump’s Tariffs And Trade: Uncertainty, Chaos Or Brilliance?
Forbes, Mike Patton (6/3/25)
- How Trump’s second term might affect the market and your finances
The Conversation, Art Durnev (4/3/25)
- US corporate bond investors cautiously navigate trade war uncertainty
Reuters, Matt Tracy (6/3/25)
This week in Trumponomics: Playing chicken with marketsYahoo Finance, Rick Newman (8/3/25)
- Measuring fear: What the VIX reveals about market uncertainty
The FRED Blog, Aakash Kalyani (13/2/25)
- Trump shrugs off stock market slump, but economic warning signs loom
The Conversation, Conor O’Kane (17/3/25)
Data
Questions
- Find out what tariffs have been proposed, imposed and changed since Donald Trump came to office on 20 January 2025.
- In what scenario might US investment be stimulated by Donald Trump’s policies?
- What countries’ economies have gained or are set to gain from Donald Trump’s policies?
- What is the USMCA agreement? Do Donald Trump’s policies break this agreement?
- Find out and explain what has happened to the US stock market since January 2025. How do share prices affect business investment?
- Which sector’s shares have risen and which have fallen?
- Using the Data link above, find out what has been happening to the US Policy Uncertainty Index since Donald Trump was elected and explain particular spikes in the index. Is this mirrored in the global Policy Uncertainty Index?
- Are changes in the Policy Uncertainty Index mirrored in the World Uncertainty Index (WUI) and the CBOE Volatility Index: VIX?