Trade Clarity « TSI Blog

August 6, 2025

[This blog post is an excerpt from a commentary published last week at www.speculative-investor.com]

Temporarily at least, we have some semblance of clarity on the international trade front, with a trade deal covering most imports being announced at the start of this week between the US government and the EU. Like the earlier one between the governments of the US and Japan, this deal involves huge and fictitious dollar amounts of promised investments and spending. In this case, the fictitious amounts are US$750B of EU purchases of US energy over three years and US$600B of EU investment in the US.

The investment/spending amounts that have been linked to the deals are made-up numbers that bear no resemblance to reality, because:

1) The parties making the agreements are not the ones that would be doing the investing/spending. For example, the EU is not a legal entity that invests in the US or purchases energy from the US.

2) In order for an investment to be made in the US, an investor would have to believe that the investment will achieve an adequate return. Therefore, the amount that will be invested will be determined as it always has been determined: by the forecast return on the investment, taking risk into account.

3) The only way that the EU could greatly increase the amount of energy it buys from the US would be to change energy trade routes. To be more specific, a lot of the energy (oil, LNG and coal) that is being shipped from the US to destinations other than the EU would have to be re-routed to the EU, and a substantial portion of the EU’s current energy imports would have to be re-routed to other countries. This would result in substantial extra costs being incurred for the benefit of no one other than the energy shipping industry. Perhaps that is why the stock price of Flex LNG (FLNG) was very strong during the first two days of this week and has broken out to the upside.

As an aside, it generally is the case that when one country or region takes actions that hampers trade, trade doesn’t stop; it moves. This concept was highlighted in the UPS earnings call on Tuesday of this week. In this call UPS first noted that during May-June there was a 34.8% drop in the average daily volume in the company’s China-US trade lane, and then noted: “…in the second quarter, we saw volume in our China-to-the-rest-of-the-world trade lanes increase by 22.4%, and we nearly doubled our capacity between India and Europe to meet the growing export demand on that trade lane.”

4) In the way it handled the attempts by Nippon Steel to buy US Steel, the US government has demonstrated that it does not want additional foreign investment in the US.

The reality is that although the recent trade deals have included huge numbers that supposedly reflect additional foreign investment in the US, these deals will not result in any investments that would not have occurred anyway. The touted numbers are solely for public relations purposes.

The recent deals have added some clarity, but the overall level of trade-related uncertainty remains high.

One reason is that there is a 12th August deadline for the US and China governments to do one of the following: a) come to a new agreement on trade terms involving tariff rates and export restrictions, b) extend the terms of a temporary arrangement that was agreed in mid-May, or c) return to the ridiculous tariff rates and restrictions that applied prior to the mid-May agreement. A 90-day extension of the current terms is widely expected.

Another reason for a continuing high level of trade-related uncertainty is that Trump has shortened the time for Russia to strike a peace deal with Ukraine or face secondary sanctions (these would be sanctions on countries that import Russian products). The new deadline mentioned earlier this week is about 10 days from now. This will be interesting, because a) there won’t be a peace deal prior to this deadline, b) China is the main importer of Russian products and c) India gets about 45% of its oil from Russia. The US can’t punish China for importing Russian products, because via its control of REE supply China’s government has the ultimate weapon in the trade war. However, the US could punish India with secondary tariffs, but what would this achieve?

The fact is that all the oil currently produced in the world gets bought by someone, so the only way that India could stop consuming Russian oil would be to take oil that currently is being consumed elsewhere, causing a supply shortage elsewhere that would have to be filled with…Russian oil. There simply is no way to prevent the global consumption of Russian oil and any attempts to do so would have minimal effects on Russia but could cause major problems in other countries/regions.