Financial Newsletter 2025.07.04
Trump's Shockwave: A Radical Bill, a Divided Party, and a Remade America
Tariffs, Bills, and Negotiations
The Trump administration could begin sending letters to a dozen countries as early as this Friday, unilaterally setting the tariff rates they will be required to pay. This "act first, negotiate later" approach comes as the final deadline for negotiations looms on July 9. President Trump appears to have grown tired of tedious, country-by-country talks, preferring the straightforward approach of simply sending out "bills."
This maximum pressure campaign is already making some nations uneasy. On Wednesday, for instance, the U.S. announced a deal with Vietnam, imposing a 20% tariff on Vietnamese exports and a staggering 40% tariff on goods deemed to be rerouted through Vietnam to circumvent other duties.
The move is a clear shot at supply chain relocation. While this rate is lower than the initially threatened 46%, it is still significantly higher than the previous general level of 10%. Interestingly, though details of the agreement have yet to be released, the announcement prompted a stock price increase for U.S. manufacturers with factories in Vietnam. It seems the capital markets’ craving for certainty has overcome their fear of the tariffs themselves.
However, the tougher challenges lie ahead. Difficult negotiations are still underway with major trading partners like the European Union, Japan, and South Korea. European Commission President Ursula von der Leyen has frankly admitted that reaching a final agreement by July 9 is "impossible." The current goal for both sides is merely to achieve a framework "agreement in principle."
The EU's trade commissioner is currently engaged in shuttle diplomacy in Washington. They seem willing to accept a general 10% tariff but are hoping for exemptions for sectors already hit by high tariffs, such as steel and automobiles. German Chancellor Friedrich Merz is particularly anxious, as Germany’s key auto, chemical, and machinery sectors are all on the line.
"Better simple and swift than long and complicated," he stated bluntly.
In contrast, Trump's stance toward Japan is much tougher. Just a couple of days ago, he remarked that Japan should "pay 30%, 35%, or whatever number we decide," his words laced with impatience. The next few days in this high-stakes game are sure to be volatile.
Diplomacy and Geopolitical Tensions
In other news, Trump also spoke with Vladimir Putin by phone yesterday to discuss the war in Ukraine, but he admitted that "absolutely no progress was made today." The Kremlin stated that Putin rejected Trump's call for a quick end to the war, insisting that Russia would not abandon its objectives in Ukraine.
The timing of the call was noteworthy, coming just as U.S. officials indicated they had paused arms shipments to Ukraine. Trump explained the pause was necessary to ensure the U.S. maintained sufficient weapons stockpiles, but the statement is certain to cause unease in Kyiv.
The Centerpiece Bill: Tax Cuts, Spending Cuts, and Debt
The centerpiece of the administration's new agenda is a sweeping legislative bill. First and foremost, the bill makes the various tax cuts from Trump's first term, which were set to expire at the end of 2025, permanent. This includes the higher standard deduction and child tax credits that benefit middle-class families, as well as the rate cuts, business deductions, and estate tax relief that are more skewed toward high-income households.
According to the White House's own estimates, the combined effect of the tax cuts and economic growth would give a family with two children an extra $10,000 a year. However, nearly all independent analyses point to one fact: the wealthiest households stand to gain the most.
For example, a model from the Tax Policy Center shows that households earning over a million dollars a year will see their after-tax income increase by 3.4%, an average gain of $12,500. For middle-income families, the increase is about 2.3%. The situation is even more dramatic for the top 0.1%, those with annual incomes of at least $5.1 million, who would receive an extra $83,000.
Beyond extending old policies, the bill is packed with new "perks" Trump promised on the campaign trail, such as tax relief for tips, overtime pay, car loan interest, and even a new break for seniors. For the roughly 4 million workers who rely on tips, like waiters and hairdressers, the bill provides a tax credit of up to $25,000. It also creates a $6,000 "bonus" extra deduction for senior citizens. It all sounds wonderful, but the devil is in the details: most of these new tax breaks are temporary and are set to expire in 2028.
So, where does the money come from?
The answer is twofold: slashing social programs and increasing the national debt. The bill takes a hatchet to Medicaid, the health program primarily serving low-income individuals and people with disabilities, cutting its funding by nearly $1 trillion. It also tightens eligibility for the Supplemental Nutrition Assistance Program (SNAP), commonly known as "food stamps," cutting it by $185 billion.
According to the non-partisan Congressional Budget Office (CBO), nearly 12 million Americans will lose their health insurance by 2034 as a result. The Penn Wharton Budget Model predicts that by 2033, the standard of living for the bottom 60% of American taxpayers will actually decline under the bill.
In protest, Democratic Leader Hakeem Jeffries delivered a record-breaking 8-hour and 44-minute speech on the House floor, calling the bill a "full-scale assault on the healthcare of the American people." Even the president of the U.S. Conference of Catholic Bishops issued a condemnation, calling the cuts "unconscionable" and warning they would inflict the greatest harm on the most vulnerable members of society.
Meanwhile, the clean energy sector has emerged as one of the biggest losers. The bill repeals most of the subsidies and tax credits for clean energy established under the Biden-era Inflation Reduction Act. For instance, the $7,500 tax credit for new electric vehicles and the $4,000 credit for used ones will both disappear after September 30, 2025. This is undoubtedly a heavy blow to the transitioning auto industry and to investors committed to carbon neutrality goals.
Even with such drastic spending cuts, the hole in the budget couldn't be filled. Ultimately, the bill resorted to the simplest and most blunt solution: borrowing. It raises the federal debt ceiling by a record $5 trillion in one go to prevent a government default in the coming months. This means the national debt, already exceeding $36 trillion, will continue to soar.
The CBO projects the bill will add at least $3.4 trillion to the U.S. debt over the next decade. This has many "deficit hawks" deeply worried that it will push up interest rates, ultimately forcing consumers to pay more for mortgages and car loans.
The Political Drama
This brings us to the political drama behind the bill's passage, which played out like a real-life House of Cards. The Republican party was itself torn apart by infighting, with factions from the arch-conservative Freedom Caucus to moderate members worried about their re-election prospects all deeply dissatisfied with parts of the legislation.
The entire process was defined by a conflicted dynamic where some lawmakers publicly blasted their own party's bill only to vote for it at the last minute. Senator Lisa Murkowski of Alaska, for example, cast a crucial "yes" vote after securing an exemption for her state, only to remark afterward, "I don't like this bill."
Even more curiously, one of Trump's biggest financial backers, Elon Musk, became a fierce opponent of the bill. He decried it as "debt slavery" and vowed to fund primary challengers against any Republican who voted for it. However, faced with Trump's formidable control over the party and a mix of threats and inducements, only two House Republicans ultimately voted no. After the bill passed, a triumphant Trump declared, "I think I have more power now."
Asian Markets and Investment Outlook
Turning our attention to Asian markets, Hong Kong and Singapore have also made noteworthy moves recently. To defend its Linked Exchange Rate System, the Hong Kong Monetary Authority (HKMA) intervened again this week, buying up a substantial HK$29.6 billion. This marks the third recent intervention. The underlying driver is the "carry trade"—borrowing the low-interest Hong Kong dollar to buy the high-interest U.S. dollar.
By buying up Hong Kong dollars, the HKMA drains liquidity from the market, pushing up local interest rates and thereby increasing the cost of the carry trade to stabilize the exchange rate. This operation is crucial for maintaining Hong Kong's financial stability and serves as an important window into global capital flows.
Singapore, meanwhile, is moving to cool its red-hot property market. The government has introduced new measures that extend the holding period required to avoid the seller's stamp duty on private residential properties from three years to four. It also sharply increased the tax rates for short-term sales; for example, the tax for selling a property within one year has skyrocketed from 12% to 16%. These steps were prompted by a recent surge in short-term property flipping, forcing the government to step in and curb speculation.
Investment Perspective
From an investment perspective, the passage of this bill could reshape the U.S. investment landscape. For small business investors, the benefits for Qualified Small Business Stock (QSBS) have been expanded. The asset threshold for a qualifying "small business" was raised from $50 million to $75 million, and the tax-exempt gain limit was increased from $10 million to $15 million. This change could stimulate investment in startups and growth-stage companies.
The bill's passage marks a major victory for Trump's second-term domestic agenda, but it also creates political risks for the Republican party heading into next year's midterm elections. Democrats have already made it clear they will use the bill as a primary line of attack against the GOP, especially targeting Republican incumbents in competitive districts.
Market Perspective
From a market perspective, the bill is likely to have a complex impact on the U.S. economy. On one hand, the large-scale tax cuts could certainly stimulate consumption and investment, particularly for high-income groups. On the other, the significant increase in the fiscal deficit could drive up long-term interest rates, which is bad news for both the stock and real estate markets.
For China's A-share market, the effects are likely to be felt in several areas. First, continued uncertainty in U.S. trade policy could weigh on the valuations of export-oriented companies. Second, an expanding U.S. fiscal deficit could push up global interest rates, which is unfavorable for capital flows to emerging markets.
Third, the bill's cuts to clean energy tax incentives could slow the pace of the global green energy transition. However, this could paradoxically create an opportunity for Chinese renewable energy firms, as reduced U.S. government support might enhance the competitiveness of Chinese companies in the global market.
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