Potential Global Trade War

By Ankika Biswas

(Reuters) – As investors across the globe prepare for a possible trade war with U.S. President-elect Donald Trump back in the White House next week, various economists and strategists speculate that his proposed significant tariff increases could serve as a negotiation strategy.

While China is a primary focus of these risks, experts attending the Reuters Global Markets Forum (GMF) believe the impacts on global trade might not be as drastic as currently anticipated.

Carie Li, a global market strategist at DBS Bank in Hong Kong, remarked, “According to what (Trump) had done during the previous term, tariff hikes could end up being a negotiation tactic.”

Trump’s team is reportedly working to prevent inflation spikes, which remains a significant concern in the U.S., according to Li.

The President has promised tariffs of 10% on global imports, 60% on Chinese products, and a 25% surcharge on items from Canada and Mexico, potentially disrupting trade, increasing costs, and provoking retaliation.

Minxiong Liao, a senior economist at GlobalData.TS Lombard APAC, noted that while these proposed tariffs could diminish demand, they may also act as a useful negotiation tool to secure better deals from trade partners, suggesting that not all of the proposed tariffs may ultimately be enforced.

The World Bank has issued a warning indicating that U.S. tariffs of 10% might reduce global economic growth by 2.7% in 2025, cutting growth by 0.3 percentage points (pp) if other trading partners retaliate.

According to Tianchen Xu, a senior economist at the Economist Intelligence Unit, China’s weighted average tariff rate could rise by as much as 20 pp between 2025 and 2027, while for the rest of the world, increases won’t surpass 5 pp.

China’s strategy to sustain a forecast-beating 5% growth by increasing debt and allowing the yuan to devalue in response to tariff hikes raises concerns about deepening structural issues within the world’s second-largest economy by 2025.

Xu explained, “Depreciation can help exports and mitigate some of the tariff impact, (but it) hurts investor confidence in the currency and the Chinese economy.” He predicts an exchange rate of 7.5 yuan per dollar as a critical threshold for China’s central bank by 2025, asserting, “Nobody wants to hold a devaluing asset.”

If the PBOC slightly relaxes its control over the RMB market, with DB Bank’s Li suggesting that USD/CNH might be at risk of testing the 7.5000 mark.

Since Trump’s election victory in early November, the onshore yuan has depreciated approximately 3% against the dollar, mirroring trends seen in major currencies.

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