By Wei Hongxu
On the momentous day of November 26, a ripple of anticipation fluttered through the global economic landscape as U.S. President-elect Donald Trump unleashed an audacious proclamation on his favored social media platform. On his very first day in office, he vowed to levy a sweeping 10% tariff on all goods streaming in from China, while simultaneously casting a net of new tariffs—potentially spiraling up to 25%—on goods originating from Canada and Mexico. This declaration not only crystallized his unyielding resolve to realize his campaign pledges but also set the stage for palpable volatility in the markets. The greenback surged in strength, while its counterparts—the Chinese yuan, Canadian dollar, and Mexican peso—suffered notable declines. The offshore yuan slipped to approximately 7.26, echoing its nadir from July.
Trump’s preemptive strike on tariff policy, surfacing sooner than the market’s collective anticipation, caught many off guard. With only four years on the presidential clock, there lies an intrinsic urgency in Trump’s strategy; he is poised to sprint toward his policy objectives, determined to maximize his window of opportunity. This duality reveals his fervent commitment to delivering on electoral promises, whilst simultaneously laying fertile ground for the Republican Party to cultivate future voter allegiance. Such urgency underscores his acute awareness of the hurdles ahead.
It’s imperative to dissect the motives behind this imposition of extra tariffs. Trump articulated a clear rationale: China’s failure to adequately mitigate the flow of illicit drugs into the U.S. via Mexico. “Until such time as they stop, we will be charging China an additional 10% Tariff, above any additional Tariffs, on all of their many products coming into the United States of America,” he asserted vehemently. Furthermore, he illuminated that this new tariff initiative aims to galvanize Mexico and Canada into taking decisive actions to fortify border security and combat the insidious export of fentanyl. He asserted that these neighboring nations possess both the capability and obligation to resolve these chronic issues, lest they encounter severe repercussions for their inaction.
This stance is emblematic of Trump’s assertive approach to tackle pressing domestic dilemmas like drug trafficking and unauthorized immigration. Simultaneously, it reveals a “transactional” mindset towards tariffs—viewed not merely as a solution to trade disparities, but as instruments of strategy. Notably, predictions from ANBOUND’s founder, Kung Chan, suggest that Trump is unlikely to adhere to his earlier vow of a staggering 60% tariff on Chinese imports. Instead, the expectation is that the actual tariffs will land much lower, contingent upon the dynamics of U.S.-China negotiations. Thus, the announced 10% could merely be a launching pad into more intricate rounds of trade dialogues.
Equally startling is the breadth of Trump’s tariff threats, which extend not only towards China but also towards its North American neighbors, Canada and Mexico—drawing them into a financial maelstrom with tariffs potentially peaking at 25%. Should these tariffs materialize, it would represent a seismic shift within the North American Free Trade Area (NAFTA) and signal intentions to upend the United States-Mexico-Canada Agreement (USMCA) established during his inaugural term. This approach exemplifies Trump’s broader inclination towards isolationism on the global stage. Besides pressuring Canada and Mexico on immigration and narcotics, the tariffs aim to catalyze a resurgence of manufacturing within U.S. borders, dovetailing with Trump’s “America First” ethos.
Throughout his campaign, Trump has vocally accused Mexico, China, Canada, and the European Union of exploiting U.S. trade concessions—an undercurrent that jeopardizes the integrity of the USMCA. Mexico, capitalizing on its low-cost labor and geographic proximity, has not only attracted considerable investments from automobile manufacturers but has also firmly entrenched itself within North America’s automotive supply chain. Benefitting significantly from the previous rounds of U.S.-China trade hostilities, Mexico’s trade surplus with the U.S. has burgeoned annually, crowning it as the U.S.’s biggest trading partner and the second-largest contributor to its trade imbalance. These realities starkly contradict Trump’s ambitions of slashing the trade deficit and rejuvenating domestic manufacturing, particularly in the Rust Belt. In a breathtaking assertion, he previously floated the idea of slapping a draconian 100% tariff on Mexico’s auto exports to the U.S.
This laser focus on Mexico not only illustrates his attempts to thwart Chinese firms circumventing tariffs by rerouting through other countries, it also emphasizes his drive to nudge American automakers to relocate production back to the U.S. Such maneuvers paint a complex picture of the ongoing “trade war” between the U.S. and China, extending its implications to burgeoning markets in Southeast Asia and Mexico, which have surfaced as alternative conduits for Chinese entities seeking access to the U.S. market, all while dodging the fallout of the trade conflicts. With the introduction of a 25% tariff on Canada and Mexico, alongside a 10% tariff aimed at China, Trump effectively elevates tariffs on the U.S.’s prime trading partners to a striking 28%-29%. The implication for Chinese companies is stark—rerouting through alternate markets to penetrate the U.S. landscape becomes a far less viable strategy.
Trump’s tariff machinations are clear indicators of his fundamentally divergent approach from the Biden administration’s “Small Yard, High Fence” strategy of “decoupling,” which may ultimately tilt in favor of China. Despite his fervent attempts to validate his campaign promises and engender trust amongst American voters, the daunting task of reindustrialization—through a seismic overhaul of global trade and supply chains—remains an uphill battle. The decades-long saga of deindustrialization has rendered the cost structures and environmental foundations of U.S. manufacturing drastically altered. Even with universal tariffs on imported goods, claiming comprehensive reindustrialization seems an elusive dream. Moreover, the market’s acumen suggests that this weaponization of trade policy will reverberate directly onto the value of the U.S. dollar and inflation metrics domestically, where shifting conditions will invariably influence the tempo and vigor of Trump’s tariff negotiations.
Currently, these actions are undeniably inflicting tangible repercussions on global capital markets. This includes ongoing depreciation of the Chinese yuan—a trend that has accelerated since Trump’s electoral triumph. Following the announce of the 10% tariff on goods from China, the offshore yuan exchange rate plunged to 7.26, echoing its previous low from July. In this context, while a 10% tariff exerts a relatively moderate impact on the yuan, any escalation in tariffs could herald steep repercussions for the currency’s valuation. Bank of America’s forecasts signal a potentially severe depreciation of the yuan to levels as low as 7.6 per dollar in the initial half of the following year should tariffs escalate to 40%. Should they reach 60%, predictions suggest a staggering depreciation to about 8 per dollar. Although exchange rate fluctuations impact the valuation of China’s capital markets, the trajectory of the yuan is expected to remain primarily tethered to its own economic fundamentals.
In summary, the 10% tariff on Chinese goods marks merely the inception of what appears to be a renewed “trade war.” In juxtaposition to Biden’s carefully curated strategy, this impending trade conflict is set to be more direct and extensive, targeting a wider array of nations for an extended duration. This scenario forecasts a relentless pursuit for greater U.S. market independence, translating into a protracted arena of competition between China and the U.S.—one that is poised to exact a toll upon both sides. The ultimate resolution will hinge on each nation’s internal stability and economic fortitude. For China, navigating the challenges posed by this burgeoning trade conflict necessitates more than simply resorting to tariffs; the focus must shift towards bolstering domestic demand, rectifying internal disparities, and strengthening the fabric of internal circulation to effectively confront challenges in external trade.
Final Analysis Conclusion:
Before officially stepping into the role of president, Trump boldly positioned himself to impose tariffs on imports from China, Canada, and Mexico as remedies to pressing issues like drugs and illegal immigration. This not only aligns with his electoral promises but also highlights his broader “isolationist” policy framework, illuminating his perception of tariffs as strategic bargaining tools. The initiation of these tariff negotiations signals the dawn of a new chapter in a protracted strategic confrontation that looms on the horizon.
- Wei Hongxu is a Senior Economist at the China Macro-Economy Research Center at ANBOUND, an independent think tank.
