If China is in the 60% tariff crosshairs

During his campaign and leading up to his inauguration, Trump has articulated his stance on several pivotal economic policies. He aims to reduce domestic corporate and income taxes, impose steeper tariffs on imports, promote fossil energy usage, and expel illegal immigrants. Trump, who has called tariffs "the greatest thing ever invented," has proposed imposing a 60% tariff on Chinese imports and a blanket tariff of 10% to 20% on all other imports.

Given Asia's heavy reliance on exports and trade, Trump's aggressive tariff policy could significantly impact the region's exports, investment, sentiment, and overall economic growth. The reverberations could be similar to those experienced during the US-China trade war in Trump’s first term. Asia's foreign exchange markets would also feel the pinch. Notably, if Trump implements the proposed 60% tariffs on Chinese goods, it could severely impact China, especially since much of its Q4 2024 GDP boost came from tariff front-running by exporters bracing for policy shifts.

Trump and his team champion a distinctive view of tariffs, contrary to conventional economic wisdom that labels them inflationary and growth-stifling. They argue for a holistic approach, positing that Trump's comprehensive policy mix will rejuvenate manufacturing in the U.S., suppress inflation by slashing fossil energy costs, and elevate real wages through tax reductions and deregulation. Trump contends that steep tariffs will compel companies to rapidly relocate manufacturing back to U.S. soil to dodge hefty duties.

In the grand chessboard of global politics, Trump's proposed tariffs—a staggering 60% on Chinese imports and a blanket 10% on imports from all other nations—seem less hypothetical and more like a looming reality, especially under his administration. This move would mark a profound escalation from his first term when the average U.S. tariff on Chinese goods rocketed from 3.1% at his inauguration in 2018 to 19.3%.

This tariff strategy is designed not just as an economic lever but as a geopolitical tool aimed at penalizing unfair trade practices and recalibrating trade balances with allies.

Here's something to consider: a swift and sizable hike in Chinese goods and targeted tariffs on selected products from other countries. This targeted approach might avert a full-blown global trade war while focusing intensely on China, mitigating broader inflationary impacts.

Trump is poised to use the same "Section 232" national security justification and "Section 301" for unfair trade practices that he employed in his first term but with a quicker trigger finger. Unlike the gradual rollout of tariffs during his first presidency, Trump's second term could see immediate tariff implementations, leveraging the International Emergency Economic Powers Act to bypass Congressional approval.

For China, Trump might initiate a 60% tariff, potentially exempting specific product categories to use as a bargaining chip in negotiations. This maneuver would fulfill campaign promises while preserving some negotiating leverage.

Economically, such aggressive tariffs could raise U.S. inflation by 0.7 percentage points and trim GDP growth by 0.2%, according to the Peterson Institute for International Economics (PIIE). However, Trump’s energy policies, which align with his broader economic strategies, could offset some inflationary pressures by lowering crude oil prices. At the same time, the stronger dollar could act as the ultimate buffer.

Analyzing the impact of Trump's tariffs on CNY and Asian fx markets

Amid the unfolding drama of Trump's aggressive trade policies and the consequent surge in the dollar, the Chinese Yuan (CNY) and the ASEAN currencies have found themselves on shaky ground. The CNY has not fully mirrored this intensified dollar strength amid intervention efforts. The broader CFETS basket, including the Asia Dollar Index, hints that the market has only tentatively priced in the looming threat of hefty U.S. tariffs—factoring in just half the possible impact.

Economic strategists speculate that a formidable 60% tariff from the U.S. could force the CNY to depreciate by 10%-12% against the dollar to counterbalance the tariff's sting, assuming other variables hold steady. Reflecting on the tumultuous US-China trade war from March 2018 to September 2019, the CNY depreciated by about 12% against the dollar. However, this wasn't solely a response to tariffs; it also unfolded amidst a 10% climb in the dollar, diluting the direct impact of tariffs on the yuan’s movement.

The likelihood of the People's Bank of China (PBOC) allowing an unchecked plunge of the CNY is slim, although a gradual depreciation is still on the cards.. Considering the ongoing economic volatility, the PBOC is poised to step in to prevent a free fall. With potential tariff retaliations looming and the risk of escalating global tariffs on Chinese products, China’s economic landscape is precarious. Saddled with challenges like the beleaguered property sector, tepid domestic demand, and burgeoning local government debts, a drastic devaluation of the CNY could trigger financial chaos.

If the U.S. wields tariffs as a bargaining chip, expect a more measured depreciation of the CNY, stretching across negotiation timelines similar to those seen during the first Trump administration. This gradual approach could help cushion the immediate economic shocks while strategically recalibrating in response to global trade shifts, navigating through the stormy waters of international diplomacy and economic strategy.