The United States is poised to broaden its tariff war to include more countries, driven by the widening US current account deficit. As part of a broader strategy, President Trump has pledged to impose additional tariffs of 25% on Canada and Mexico as early as February. The President has also warned of a potential 10% tariff on China, highlighting fentanyl flows from the country as a key concern. Amidst these developments, the US Dollar has stabilized with traders digesting the implications of Trump’s tariff talks, while the European Central Bank’s (ECB) rate cut expectations weigh on major currencies.
China finds itself amidst geopolitical challenges and is exploring concessions to ease tensions. These include curbing fentanyl trafficking, increasing imports from the US, and opening its services sector further. Such moves are seen as potential steps to stave off higher tariffs once these immediate measures are exhausted. The Chinese government is prioritizing boosting domestic consumption to support economic growth and reduce reliance on external demand. Concurrently, Chinese firms are shifting their exports towards intermediate goods, with global supply chain relocation expected to accelerate.
"We see some low hanging fruit for China in terms of concessions it could make near-term, including curbing fentanyl trafficking more forcefully, increasing imports from the US, opening its services sector further, and allowing negotiations towards a TikTok joint venture with US participation. In addition, ahead of the next tariff hike, the central bank is likely to remain focused on CNY stability, which could delay a domestic policy rate cut. However, these moves may only temporarily ease tensions, with higher tariffs likely to come once the low hanging fruit is picked."
President Trump's strategy marks a shift from his previous term, adopting a more transactional approach. By not announcing immediate tariffs on China, Trump appears to be allowing room for negotiations and potential concessions. However, this does not preclude the possibility of future tariffs as the global supply chain realignment gains momentum under what some are dubbing "Trump 2.0." Trump's rhetoric suggests a more gradual approach to tariffs on China, contrasting with his more aggressive stance towards the Eurozone.
"President Trump has pledged to enact 25% additional tariffs on Canada and Mexico as early as February. While he warned of another 10% tariff on China, his reasoning for this seems to centre around fentanyl flows from China. He noted that Europe “treats us very badly”, possibly signaling a different tariff strategy versus his first term – a more gradual approach to tariffs on China to allow for negotiations and concessions, but no longer targeted exceptionally at China."
In Europe, the GBP/USD faces renewed selling pressure during European trading hours, reflecting the financial uncertainty surrounding these developments. Meanwhile, Bitcoin's price continues to decline, trading below $102,000 at the time of writing, indicating volatility in digital currency markets amidst global economic tensions.
The backdrop of these economic maneuvers includes the anticipation of mid-tier US economic data set to be released later in the day. This data is expected to provide further insight into the economic trajectory amidst ongoing trade negotiations and tariff implementations.
"In the face of the geopolitical challenges, China has prioritized boosting domestic consumption to support growth and lessen its reliance on external demand. Chinese firms are actively adapting by reshuffling their supply chains and investing overseas, with more value added occurring outside China. Under Trump 2.0, we expect the global supply chain reorientation to accelerate."