We’ve seen a busy week of newsflow and in the process have revisited two major themes of the year so far – tariffs and political uncertainty.
On tariffs, the spectre of an end to the détente between the US and China briefly spooked markets, while on politics, France has a Prime Minister (who looks remarkably familiar), while in Japan uncertainty prevails as the collapse of the ruling coalition leaves the new LDP leader Sanae Takaichi scrambling for votes to become Prime Minister.
Last Friday President Trump hit out at China for proposing to tighten rules on the export of rare earths, accusing them of “being very hostile” and “trying to hold the world captive”. China holds almost half of the world’s known rare earth reserves, and their restrictions are due to come into effect in December. 70% of the rare earth minerals imported into the US are from China. Trump posted on Friday that he would impose an additional 100% tariff on China effective 1 November, along with export controls on critical software. In addition, Trump threatened to pull out of a meeting with Chinese President Xi Jinping, saying he had not cancelled it but “did not know that we’re going to have it”. China’s Commerce Ministry responded on Sunday saying, “China’s position on tariff wars has always been consistent: we do not want to fight, but we are not afraid to fight”. The Commerce Ministry also sought to reassure that the impact of controls on rare earth exports on supply chains would be “extremely limited” and that companies “need not worry”, given “any applications for civilian use that comply with regulations would be approved”. President Trump then posted a more conciliatory message on social media; “Don’t worry about China, it will all be fine! Highly respected President Xi just had a bad moment. He doesn’t want Depression for his country, and neither do I. The U.S.A wants to help China, not hurt it!!!”.
The episode briefly unsettled markets where the prevailing view was that the trade détente between the US and China would continue, with the rolling 90-day agreement to pare back tariffs on each other set to be extended when it expires next month. The ‘truce’ agreed between the US and China back in May was incredibly important in settling market nerves around a trade war and the potential risks of a US recession. Back in May, the US and China cut respective tariffs on each other by 115 percentage points. Since then, we have seen one 90-day extension to the truce agreed, with the next deadline approaching on 10 November. This is a not so gentle reminder that tariffs are not settled and will continue to be used by President Trump to exert influence. Trump and Xi are not due to meet until the very end of this month at the APEC summit in South Korea and the US and Chinese have been engaged in unofficial talks this week on the fringes of the IMF conference taking place in Washington.
This may well just be posturing ahead of the negotiations, but the hawkish language on China from the US will likely continue until the US has more assurances over the impact of rare earth export restrictions on their domestic supply chains. US Treasury Secretary Scott Bessent told the Financial Times that China is to trying to hurt the world economy and that “this is a sign of how weak their economy is, and they want to pull everybody else down with them”. Bessent claimed “they are in the middle of a recession/depression and they are trying to export their way out of it. The problem is they are exacerbating their standing in the world”. Bessent told Fox Business that “they [China] have pointed a bazooka at the supply chains and the industrial base of the entire free world, and we’re not going to have it.” Meanwhile, trade data from China published this week served as a reminder that China is moving on from trading with exports up 8.3% year on year in September, ahead of expectations. This is despite exports to the US down 27% year on year, highlighting that China is finding alternative markets for its exports.
Staying on the theme of uncertainty, last week we thought we had some visibility and I wrote that new Liberal Democratic Party (LDP) leader Takaichi Sanae “will now need a simple majority of votes in parliament in a session scheduled for 15 October to be confirmed as Prime Minister”. However, the collapse of the 26 year-old coalition of the LDP and Komeito parties has now disrupted her path to power. Opposition parties are now in talks to build a coalition to block Takaichi from becoming Prime Minister. The ruling bloc had already lost control of both the Upper and Lower houses of Parliament, and the LDP, as largest party will now seek the support of the Japan Innovation Party, the third largest party. The leader of the second largest party, the CDP, Yoshihiko Noda, indicated he was open to backing a Prime Minister outside of his party. A vote may happen next week but is far from certain given opposition parties are still in negotiations. Takaichi’s support for an expansionary fiscal policy and a slower pace of interest rate hikes resulted in a strong equity rally and steeper yield curve. But markets, and Japanese politics, are now in limbo awaiting whatever comes next.
Moving on to the feuilleton that is French politics and last Friday night saw the announcement of the new French Prime Minister by President Macron, who chose to reappoint Sebastien Lecornu, who resigned at the start of last week. Lecornu avoided complete déjà vu by announcing a new cabinet with some fresh faces to counter the response to the previous cabinet he proposed that was more or less a repeat of that which served under former PM Francois Bayrou. Lecornu posted “a new government has been named with a mission to give France a budget by the end of the year…. only one thing counts: the interest of our country”. Since the elections last year that delivered a hung parliament, President Macron has appointed and lost three Prime Ministers as they have struggled to reach any consensus on a 2026 budget that includes cuts to the deficit.
In a speech to parliament on Tuesday, Lecornu offered to suspend President Macron’s unpopular pension reforms in order to secure parliamentary support to approve a 2026 budget and save his government. Lecornu made the concession to appease the Socialist party, offering to suspend plans to raise the retirement age to 64 until 2028, beyond the next presidential elections. He also announced tax rises on large companies and wealthy households as part of a €30bn plan to cut the budget deficit to 4.7% next year, rising to 5% over time thanks to the cost of the suspended pension reforms. As a result of the measures, the Socialist party said they would not vote to topple the government. French bonds and equities rallied, with the government bond spread over German Bunds down to a four-week low and French equities seeing a strong move higher. With the support of the Socialist party, Lecornu survived two confidence votes in parliament yesterday and as such his government looks a little more likely to survive to at least get the 2026 budget over the line. Given Lecornu’s lack of a majority however, wider policymaking is likely to remain gridlocked until the fundamental issue of a parliament divided three ways is solved via an election or more stable political alliances.
Source: Columbia Threadneedle Investments as at 17 October 2025.
