If Trump continues to influence markets with his unpredictable policies, the risk of capital outflows from emerging economies could worsen, ultimately slowing investment inflows for a prolonged period.
n his first month as the United States resident, Donald Trump implemented a more aggressive trade policy toward Canada and Mexico than China. Trump imposed a 25 percent import tariff on key products from Canada and Mexico (except for Canadian oil, which faced a lower 10 percent tariff), while imports from China were only subject to a 10 percent tariff. This policy heightened tensions among US-Mexico-Canada Agreement (USMCA) nations.
In response, Canada announced a 25 percent tariff on US imports starting Tuesday. The affected products include beverages, cosmetics, paper goods, passenger and industrial vehicles, steel and aluminum products and certain food items. Meanwhile, Mexico has stated that it will impose retaliatory tariffs but has not yet specified the targeted products or tariff rates. Trump, on the other hand, has maintained stable relations with China to avoid disrupting critical global supply chains.
The high US tariffs, followed by retaliatory measures from affected countries, may increase import costs and create uncertainty in global markets. From a supply chain perspective, these tariffs could drive up raw material prices across various industries. Multinational companies are being forced to restructure their supply chains by diversifying raw material sources and relocating production to countries with lower tariffs. In the long run, this protectionist policy could lead to market fragmentation, prolonged stagflation risks and slow economic growth.
Trump has also pressured the Federal Reserve to lower interest rates, arguing it would stimulate growth through lower borrowing costs and increased purchasing power. He has emphasized that lower rates would provide necessary stimulus to strategic sectors, helping to ease inflationary pressures and encourage private investment.
However, we believe that Trump’s pressure is unlikely to influence the Fed’s decisions significantly. We anticipate the Fed will cut interest rates twice this year, despite market expectations of only one rate cut. The Fed is expected to maintain its independence in deciding interest rates, considering that inflation remains persistent and the labor market remains strong.
At the beginning of his 2025 term, Trump’s unexpected decision to delay implementing some of his campaign-promised tariffs surprised global markets, leading to a weaker US dollar. Additionally, BRICS countries reached an agreement to promote de-dollarization by increasing trade settlements in their local currencies, further pressuring the dollar in late November 2024.
Trump has since taken steps to “pump up the dollar”, making controversial statements after the currency weakened. For instance, he threatened to impose a 100 percent tariff on BRICS nations that sought to distance themselves from the dollar. Additionally, his “America First” policy has encouraged a “risk-on” sentiment in US markets, supporting a dollar rebound.
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