In a bold move that could reshape global trade dynamics, former U.S. President Donald Trump has proposed imposing a 60% tariff on Chinese imports, alongside a blanket tariff of 10% to 20% on all other imports. This aggressive trade policy stance, if implemented, could significantly impact both the U.S. and global economies. The proposed tariffs aim to address trade imbalances, but they also raise concerns about increased inflation and slowed growth.
The Peterson Institute for International Economics (PIIE) has projected that these tariffs could increase U.S. inflation by 0.7 percentage points and reduce GDP growth by 0.2%. Such economic repercussions could affect consumer spending and overall economic stability in the United States. Meanwhile, the Chinese Yuan (CNY) might face further depreciation, building on its 12% drop against the dollar during the US-China trade war from March 2018 to September 2019. This depreciation could result in significant economic challenges for China, as much of its Q4 2024 GDP boost stemmed from exporters rushing to beat potential policy shifts.
China's central bank, the People's Bank of China (PBOC), stands ready to intervene should the CNY face undue pressure. While a controlled depreciation seems likely, the PBOC is prepared to take action to prevent a drastic fall in its currency's value. The broader implications for Asia's foreign exchange markets are also concerning, as they brace for the ripple effects of Trump's tariff strategy.
Trump's energy policies may counterbalance some inflationary pressures by potentially lowering crude oil prices. This measure might provide some relief to U.S. consumers amidst rising import costs. However, the precarious state of the CNY remains a critical issue, with possible retaliatory tariffs and an escalating global tariff environment posing further risks to Chinese products.
The U.S. Dollar, bolstered by higher Treasury bond yields, easing tensions in the Israel-Gaza region, and a risk-on market profile, adds complexity to this economic landscape. Amid the U.S. holiday season and the anticipation of Trump's inauguration, markets are cautiously optimistic, yet wary of the potential impact of hefty tariffs.
The broader CFETS basket, which includes the Asia Dollar Index, reflects tentative market pricing of these impending tariffs. Analysts suggest that only half of the possible impact has been factored in, indicating room for further market adjustments. The likelihood of the PBOC allowing an unchecked plunge of the CNY remains slim, given its strategic importance in maintaining economic stability.
Should Trump's tariff plans materialize swiftly and extensively, targeted tariffs on Chinese goods and select products from other countries could significantly affect regional exports, investment sentiment, and overall economic growth. Trump's potential second term might see immediate tariff implementations, leveraging the International Emergency Economic Powers Act to bypass the need for Congressional approval.
In response to these challenges, the CNY could depreciate by 10%-12% against the dollar to mitigate the adverse effects of tariffs, assuming other factors remain constant. Meanwhile, the PBOC's decision to keep the Loan Prime Rate unchanged underscores a cautious approach to monetary policy amid ongoing economic volatility.