Key Points
Trump likely hikes tariffs soon after taking the office, unlike first term. Trump could start with imposing 60% tariffs on China products with exemptions on some categories of products (attached with conditions), or start a 60% tariff on significant part of China products and threaten for more. This allows Trump to use tariff as a negotiation tool, and without compromise much of his election promises. Trump likely levies targeted tariffs on selective products or industries for the rest of world.
60% tariffs on China products means a 0.7ppts upside for US inflation and a 0.2% decline on US GDP, according to PIIE. The upward pressure on CPI inflation could potentially be mitigated partly by Trump’s energy policy.
Impact on CNY: a 60% tariff would REQUIRE a 10%-12% depreciation of CNY to offset the negative impact of tariffs, keeping everything else unchanged. A potential less strong Dollar from now till end of 2025 compared with 2018-2019 trade war time, makes the required 10%-12% CNY depreciation much more significant than what it appears.
Fiscal support can offset the negative impact brought by the high tariffs, which in turn reduces the need for much CNY depreciation. Some estimates that it takes a fiscal stimulus of RMB 2.5 to 3 trillion to offset the 60% US tariff’s drag on China GDP, all else being equal. If that happens, CNY may not depreciate much. PBOC may intervene as well. There is upside for USD/CNY to reach 7.3 by end of 2024.
Asian currencies with higher exposure to the Chinese market may be more vulnerable, such as SGD, MYR, KRW and THB, and particularly so this time for SGD and THB, for reasons included in the article.
What tariffs will look like in Trump's second term?
During the period of his campaign, Trump has shared his positions on some key economic issues, including reduce domestic corporate and income taxes, impose higher tariffs on imports, encourage fossil energy, expel illegal immigrants and etc. While pledging to end the “inflation nightmare”, Trump said that “tariffs are the greatest thing ever invented”, and he has been proposing to impose a 60% tariff on imports from China and blanket tariffs of 10% -20% on all imports from elsewhere.
Given Asia’s reliance on exports and trade, Trump’s tariff policy would have direct impact on Asia economy’s exports, investment, sentiment and economic growth. Asia FXs will be impacted too, like what happened during the US-China trade war during Trump’s first term.
For us to understand the impact of Trump’s potential tariffs on Asia FX, we assess the possibility of Trump’s tariff proposal. And we think the below:
- Is the proposed tariff a deterrent or a real thing down the road? Can be both.
While economic findings and empirical analysis show that tariff is inflationary and detrimental to economic growth, Trump and his team see things differently.
Trump and his team emphasize on seeing tariff in a broader context, where Trump’s full set of policy proposals will bring back more manufacturing, keep inflation low by reducing fossil energy prices, and raise real wages by lowering taxes, and cutting regulations. Trump argued that higher tariff would make companies rapidly return manufacturing back to the US to avoid the levies.
For China, amid the ongoing process of US’s decoupling from China and worsening geopolitical environment, actual happening of Trump’s tariff proposal of implementing a 60% tariff on China imports and 10% on all countries is possible, especially conducted by Trump. During Trump’s first presidency, the US’s average tariff on China production increased to 19.3% from the 3.1% when Trump took office in early 2018.
Tariff could be an important tool for Trump to retaliate against countries who conduct unfair trading, rebalance trade with ally countries and etc. An actual tariff policy needs to deliver Trump these two functionalities, and we expect:
- Trump likely starts the sizeable tariff increase on China, and levy targeted tariff on selective products or industries for the rest of world.
We expect a low probability of a blanket 10-20% on “all” imports globally, we expect US to hike tariff sizably on China products in Trump’s second term.
This approach would allow US to avoid a global trade war and limit the upward inflation pressure and allow US to deal with China matters with higher focus.
- Trump may hike tariffs on China products soon after taking the office, unlike first term.
The same "Section 232" national security law used to impose global steel and aluminium tariffs and the "Section 301" unfair trade practices statute used for the tariffs aimed at China, will help to justify Trump’s intention. Trump has authority to impose tariff without needing the approval by the US Congress, and Trump could also invoke the International Emergency Economic Powers Act. So, unlike that in his first-term, Trump hiked tariffs on China products 18 months after he took the office, this time, we expect the happening of tariffs hike to be much sooner.
- For China, Trump could start with a 60% tariff on China products, with exemptions on some categories of products with conditions attached, or starts a 60% tariff on significant part of China products and threatens for more.
This approach will allow some room for Trump using the tariff as a negotiation tool, without compromising much of Trump’s election promises. Like what happened in Trump’s first term, during the negotiation phases, some tariffs can be reduced or to be implemented due to the fails of negotiations.
60% tariffs on China products means a 0.7ppts upside for US inflation and a 0.2% decline on US GDP, according to PIIE. The upward pressure on CPI inflation could potentially be mitigated by the Trump’s energy policy (potential lower crude oils reduce inflation, should the policy realize).
Peterson Institute for International Economics (PIIE) estimates (link), that imposing an additional 60% tariffs on China, and if China retaliates, would result in US real GDP to fall by more than 0.2% below baseline by 2026, and the US inflation to increase by 0.7ppts above baseline in 2025. Meanwhile, US imposing an additional 10% universal tariffs on other countries, and if those countries retaliate, would cause a drop in US real GDP by 0.9% than baseline by 2026, and the US inflation to increase by 1.3ppts above baseline in 2025.
Impact of Trump's tariffs on CNY and Asia FX
So far, since the beginning of recent Trump trade on mid-September, CNY and other Asian currencies only depreciated mildly, with CNY and the Asia Dollar index depreciating 1.88% and 1.3% respectively against the Dollar.
We believe that such levels of depreciation against the Dollar reflect that market has not yet priced in a potential large size of US tariffs on China and else, especially considering that such depreciations happened amid a 4.1% strengthening of the US Dollar and the rising US bond yields.
Impact on CNY: a 60% tariff would REQUIRE a 10%-12% depreciation of CNY against the Dollar to offset the negative impact of tariffs, keeping everything else unchanged.
A potential less strong Dollar in medium term compared with 2018-2019 trade war time, makes the required 10%-12% CNY depreciation much more significant than it appears. During the US-China trade war period (March 2018-September 2019), CNY depreciated about 12% against the US Dollar, however that 12% CNY depreciation happened amid a 10% US Dollar’s appreciation, CNY’s depreciation wasn’t entirely driven by the tariffs.
It may not be realistic for PBOC to let CNY to free fall, and they may intervene as well. Economic performance is never static. Potential tariff retaliation could worsen the situation and there is risk of other countries raising tariffs on China products too. China’s economy is at weak condition, with on-going property sector stress, weak domestic demand, local-government debts and etc. Abrupt large CNY depreciation could de-stabilize the financial system.
Fiscal support can offset the negative impact brought by the high tariffs, which in turn reduces the need for much CNY depreciation. Some estimates that it takes a fiscal stimulus of RMB 2.5 to 3 trillion to offset the 60% US tariff’s drag on China GDP, everything else being equal. Should this happen, CNY may not depreciate much.
If US uses the tariff as a negotiation tool, then CNY’s depreciation is more likely to happen during an extended period of time when negotiation is happening, like what we saw in Trump’s first trade war in 2018-2019.
Near term, the anticipation for a potential tariff could pressure the CNY weaker, to 7.3 probably by the end of this year, before more material depreciation in 2025, if there lacks sufficient fiscal support to offset the tariff’s drag on overall economy.
During the US-China trade war, CNY had a trend depreciation in the period.
Other selective Asia economies may face some tariffs In Trump’s first term trade-war period, below chart shows that market participants acted on Trump’s official tariff announcement, rather than pre-emptively depreciated the currency before an actual announcement of tariffs. And CNY had a sustained period of depreciation against the US dollar, during March 2018 till September 2019. March 2018 was the time that the section 301 report was published, followed by a series of incremental tariffs. September 2019 was the month with the last batch of tariffs being imposed by US on China’s products.
Recent depreciation of CNY and Asia currencies did NOT reflect much of potential tariffs.
Recent rising possibility of a potential Trump win has prompted some active “Trump trade” since roughly 16 September. Asia currencies had various degrees of depreciation against the US dollar, with PHP depreciating most by 5.5% and both INR and TWD depreciating least by 0.7%. Asia currency overall, measured by the dollar Asia index, depreciated by 1.88% against the US Dollar, amid a background of US Dollar’s 4.1% strengthening (against a basket of developed country currencies, measured by the DXY index), particularly, CNH only depreciated by 1.3% against the Dollar.
We think that given the highly uncertain nature of tariff policy, market still needs to see the actual tariff policies before pricing in materially the impact of tariff for exchange rates.
Another proof of market didn’t price in a large US tariff on China is that CNH has been moving near the fixing and the CNY. During recent Trump trade period, China’s onshore and offshore markets’ reactions to Trump’s victory were largely similar, with USD/CNY and USD/CNH up by 0.8% and 1.1% respectively. In terms of gap, USD/CNH was 0.27% above USD/CNY, which is modest. The spot is currently trading 0.9% above the fixing, still far from the upper band of +2%. We think the PBoC would likely adjust the fixing higher gradually if the depreciation pressure is strong and caused by US tariffs.
Impact on Asia FXs: sizable negative spillover of CNY depreciation on Asia FXs.
High correlation between USD/CNY and other Asia pairs suggests a large negative spill-over impact of a significant Trump’s tariff on some Asia currencies.
The 30-week correlation for Asian FX with the CNY could give us some clues of which Asian currencies could move more or will be more sensitive to the USD/CNY movement. We find that comparatively, SGD, MYR and KRW are quite sensitive to shifts USD/CNY. These Asian currencies will face greater depreciation risk compared with the rest Asia ones, should a large tariff on China and large size depreciation of the CNY happen.
Asian currencies with higher exposure to the Chinese market may be more vulnerable, such as SGD, MYR, and KRW …but supply chain shifts may offer some support, in medium term.
Economies such as India and the Philippines likely remain relatively more insulated to the combination of tariff increases and other key policies by Trump, given that they are less leveraged to both Chinese and US end-demand. Conversely, currencies such as SGD, MYR, THB and KRW will likely be more negatively impacted on a relative basis. For INR in particular, while the currency is seeing an airpocket in terms of foreign equity inflows right now, we think RBI will likely remain strongly in the market to cap FX volatility. In addition, we continue to expect growth to remain brisk and as such support inflows over the medium-term including through bond index inclusion.
While most Asian currencies could still have some level of tariff increase on certain products as US rebalances trade, over the medium-term, we continue to think that ASEAN economies and currencies are well placed to benefit from supply chain reallocation and diversification. These trends are structural and pre-date the US Elections and Trump and should as such continue driven by the desire of companies including from China to de-risk their supply chains and also tap opportunities in overseas demand in high growth areas.
Some additional stress for SGD and THB
During the trade war in 2018-2019, the CNY, KRW, and MYR (-7.2%) had faced larger depreciation than the rest. If US-China tensions escalate, we see further downsides for the ringgit against the US dollar from current levels (4.40 at time of writing). SGD will also be hugely impacted, as we anticipate that very onerous tariff from Trump this time around could be highly disruptive to global trade, for which the Singapore economy is highly dependent on for growth. The downside risks to Singapore's growth have risen sharply, and with core inflation likely to settle at the 2%-level by end-2024, we think the balance of risks for the MAS has shifted towards growth. We maintain our outlook for the MAS to loosen its tight exchange rate policy in the January quarterly meeting, which would weigh on the SGD. We therefore view the SGD as one of the most vulnerable regional currencies.
For the Thai baht, the tourism boom during 2018-2019 had offered quite some support as it appreciated by 1.7% against the US dollar (Mar 2018 – Sep 2019). But this time could be different, with market expectations for China outlook likely to weaken more sharply, as the Chinese economy facing tariff risk from a position of weakness. Chinese tourists made up about 30% of Thailand’s visitor arrivals before the Covid pandemic. Moreover, Thailand’s government bond yield gap with the US is negative today, as opposed to being positive during 2018-2019.
PIIE’s model implies a positive impact for rest of Asia GDP.
Recent modelling estimates from the Peterson Institute of International Economics point to some growth boost for Asian economies, even in a scenario of 60% tariffs on China and 10% on all countries. This likely accounts for some supply chain shifts to the rest of Asia, even as China slows down quite significantly due to the direct impact of the tariffs from the US.
