DDN Business Insider | Global economy faces new challenges as Donald Trump wields weapon of tariffs

Editor's note: On November 25, local time, U.S. President-elect Donald Trump posted on TRUTH SOCIAL that he would impose a 25% tariff on all products entering the U.S. from Mexico and Canada. He also announced an additional 10% tariff on Chinese goods. Against the backdrop of sluggish global economic growth, what impact will Trump's tariff policies have on the global economy?

【Anchor】Hello everyone, welcome to DDN Business Insider. I am Yunfei Zhang. On November 25, local time, U.S. President-elect Donald Trump posted on TRUTH SOCIAL that he would impose a 25% tariff on all products entering the U.S. from Mexico and Canada. He also announced an additional 10% tariff on Chinese goods. Against the backdrop of sluggish global economic growth, what impact will Trump's tariff policies have on the global economy? On this topic, we have invited renowned economists: Song Qinghui, a well-known economist; Guo Hanbing, a postdoctoral researcher at the Institute of Finance & Banking, Chinese Academy of Social Sciences; and Xia Chun, chief economist and Dean of ApaH Capital Management. Welcome, everyone!

【Anchor】First, I would like to ask Mr. Song, how do you view Trump's statement on tariff policies this time? He previously stated, during his campaign, that he would impose a 60% tariff on Chinese goods, but now he mentions the figure of 10%, what does this indicate?

Trump's statement on tariff policies can be described as shortsighted. This move will undermine global cooperation trigger turmoil in global trade, and pose significant negative impacts for China, the U.S., and the world. Trump's earlier claim of imposing a 60% tariff on Chinese goods has now been reduced to 10%, which seems to be more lenient for China—though "leniency" should be taken with a grain of salt. The tariffs on trade between the U.S., Canada, and Mexico are already quite low, and the U.S. has already enacted multiple rounds of tariffs on goods from China, creating a high baseline. Thus, an additional 10% tariff on top of this already high level is still substantial. However, compared to the initially proposed 60%, this new 10% is more pragmatic.

【Anchor】Yes, S&P has previously stated that raising tariffs on Chinese goods to 60% could lead to a 1.2 percentage point increase in the U.S. inflation rate and a drag on GDP of about 0.5 percentage points. Ms. Guo, what considerations do you think Trump's "change of heart" is based on?

Trump's fluctuation in tariff policies is within our expectations. The proposal for a 60% tariff was made during his campaign to project a tough stance and to gain support from certain voters. Now, with the tariff reduced to 10%, at least two reasons can explain this shift: first, Trump has recognized that excessively high tariffs could negatively impact the U.S. economy itself, leading him to adjust his stance after weighing the influence of trade protectionism on economic conditions. Secondly, he may be reserving some room for future trade negotiations, attempting to adopt a more moderate stance to gain concessions from China on certain issues.

【Anchor】Indeed, Trump's latest statement to impose a 25% tariff on all products from Mexico and Canada challenges the nearly 30-year-old North American Free Trade Agreement (NAFTA). Ms. Guo, if this policy is to be implemented, what impacts can we expect?

Trump's decision to impose a 25% tariff on all goods from Mexico and Canada is aimed at reshaping the North American trade landscape. He is attempting to use aggressive trade tactics to strengthen the U.S.'s dominant position in regional trade.

【Anchor】Compared to his previous term, Trump has indicated a desire to impose tariffs on all products from Mexico and Canada. In other words, he is increasing tariffs on three major trade partners, China, Mexico, and Canada. Mr. Xia, what does this signify?

During his campaign, he frequently emphasized reducing the U.S. trade deficit, which has narrowed with China but has widened with Canada and Mexico. Currently, exports from Canada and Mexico account for 80% to 90% of their total exports to the U.S., respectively. Thus, he seeks to lower the trade deficit with these three major partners. This is his main goal.

The tariffs on Mexico and Canada are relatively low compared to those posed on China. Therefore, some Chinese manufacturers may reroute their products through Mexico or Canada to bypass these tariffs. Additionally, previously, goods sent from China, like parcels mailed, valued under $800, were exempt from tariffs. Now, he is addressing these loopholes to avoid this kind of commercial arbitrage activities through tax rate differences, we will call it arbitrage.

After he balances it, he can avoid this kind of arbitrage activity with increased costs of sending Chinese goods to Mexico or Canada. Now, this has basically been controlled.

【Anchor】Ms. Guo, how do you evaluate the fact that the tariff rates on Mexico and Canada are significantly higher than China? What impact will Trump's tariff policies have on the U.S. and the global trade landscape?

The higher tariff rates on Mexico and Canada primarily address specific issues in their trade relationships, such as trade imbalances and industrial competition, which necessitate higher tariff adjustments. This decision may also reflect Trump's attempt to cater to the demands of certain interest groups in the U.S.

Imposing tariffs on all three major trade partners will have significant ramifications for both the U.S. and global trade dynamics. If implemented, it is likely to lead to rising import prices in the U.S., contributing to domestic inflation and increasing the financial burden on consumers. Moreover, it could provoke direct and indirect retaliatory measures from trade partners, intensifying trade frictions. Globally, this is unhealthy, as it will undermine the stability of global supply chains and could potentially trigger a major trade recession.

【Anchor】Yes, Trump's post was made on social media, which differs from the actual implementation of tariff measures. Mr. Xia, what do you anticipate will be the final outcome of the tariffs? Also, how much of the proposed 60% tariff on Chinese goods do you think will ultimately be realized?

This is a consistent practice of Trump in the past. When he wants to do something, he will first announce it on Twitter. After the announcement, he doesn't immediately act but observes the market's reaction for a period of time. He will proceed with what he can do, and he won't do what he can't.

Regarding the 60% tariff he mentioned, it is now generally believed that he won't increase it to 60% all at once. Instead, he may first impose a 10% tariff, and then wait for six months or a year. It is highly probable that he will increase it to 25% after a year, with plans to gradually increase it to 50% or even 100% in the future. However, all of these are just his verbal statements at present and have not become definite facts.

A 60% tariff would have catastrophic effects on China, with estimates suggesting that it could reduce China's GDP by nearly 2%. However, it would also negatively impact U.S. growth, but to a lesser extent. Furthermore, a 10% increase would likely have a greater impact on the U.S. than on China.

I believe the likelihood of actually imposing a 60% tariff is low, as China will adopt measures to negotiate, including canceling export tax rebates. This means that the price of Chinese goods will be relatively higher than in the past. So, in a way, the burden would ultimately fall on American households and businesses.

【Anchor】Analysts predict that after Trump takes office on January 20, he will likely implement his tariff policies. It is expected that tariffs on Chinese goods will increase by 10-20% from the current average of 19.3%. Mr. Song, what do you think the final outcome of Trump's tariff policies will be?

Trump's earlier claim of imposing a 60% tariff on Chinese goods was politically motivated. I expect the final outcome of the tariffs to have significant adjustments, with the possibility of delaying the imposition on China. Given that the current tariffs on Chinese products are already high, it will inevitably lead to a decline in the purchase of goods by American consumers, and low-income American families will be more affected, making it more difficult to buy daily necessities.

【Anchor】Market research indicates that if Trump's proposed new tariff plan is implemented, U.S. consumers could potentially lose up to $78 billion in annual purchasing power. Mr. Song, what negative impacts do you think will have on the U.S. and the global economy?

The implementation of Trump's new tariff plan will have significant negative effects on both the U.S. and global economies. For the U.S. economy, the new tariffs will directly lead to an increase in U.S. commodity prices, which will subsequently result in decreased demand, lower sales, reduced profits, and rising inflation, ultimately harming the economic outlook of the U.S. For the global economy, the new tariff plan may lead to a contraction in global GDP and significantly raise global trade costs, further dragging down the recovery of global trade and economic growth.

【Anchor】Yes, Mr. Xia. What preparations does China need to make in response to U.S. tariff policies?

China has already taken some actions as mentioned earlier, right? For example, export tax rebates have been canceled in some industries.

Additionally, China is increasing its openness by implementing visa-free policies for more countries, which means more people from overseas will come to China to travel. This will lead to changes in the surplus and deficit of the service industry. China can also expand access to its service sector for U.S. companies. For instance, some U.S. companies that manufacture machinery cannot operate in China, so this is one way China can respond to the current challenges.

【Anchor】Mr. Song, what areas do you think the Chinese government and enterprises should focus on to minimize economic losses caused by Trump's tariff policies?

In responding to U.S. tariff policies, I believe China needs to be prepared in three main areas. First, it should quickly explore third-party markets and strengthen regional trade cooperation. Second, it should actively adjust its supply chains while enhancing technological innovation and industrial upgrades to gradually reduce reliance on the U.S. Third, China should actively participate in international trade cooperation and adapt to the new trends of economic globalization.

【Anchor】Additionally, the latest data from the U.S. Treasury Department shows that, as of November 21, the total debt of the federal government surpassed $36 trillion for the first time, reaching $36.035 trillion, a historical high. Mr. Song, what challenges do you think this will bring to Trump's new administration?

The U.S. federal debt exceeding $36 trillion will present three major challenges for Trump's new administration. First, the new government will face a significant fiscal deficit and repayment pressure, which will undoubtedly create challenges in fiscal operations, limiting its ability to respond to economic fluctuations and social spending. Second, as one of the world's largest economies, if the U.S. federal debt were to default or encounter difficulties, it would certainly trigger turmoil in global financial markets and increase uncertainty in the global economy. Finally, the debt issuance will further complicate the power struggle between the two major U.S. parties, leading to long-term adverse effects on the future fiscal situation of the U.S.

【Anchor】Recently, Maya MacGuineas, chair of the U.S. Fiscal Accountability Committee, stated that the rising federal debt brings serious domestic and geopolitical risks, dragging down U.S. economic development, leading to rising inflation and interest rates, which further squeezes the federal budget. Lastly, Mr. Xia, how significant do you think the challenges will be for the Trump administration after taking office?

The expansion of the current debt scale is actually difficult to avoid, primarily due to Trump's tax cuts. By reducing corporate income taxes, fiscal revenue will decrease, and the increase in tariffs cannot compensate for this loss. Increasing tariffs will reduce overall trade volumes, and these two figures are not even in the same order of magnitude—there's a difference of over 100 times. Therefore, it is not feasible for him to expand and stimulate demand while controlling supply. The notion of reducing annual budget expenditures, as suggested by Musk, is also very challenging to implement. If he aims to cut $2 trillion annually, it will be quite difficult. Thus, in the future, the scale of his debt should continue to expand.

If Trump doesn't handle things properly, even with his utmost efforts, I expect that by the end of his term, the U.S. federal debt will surely exceed $40 trillion. If tariffs remain high during this process, then U.S. interest rates will need to stay elevated. There is now a view that a 4.5% yield on 10-year U.S. Treasuries represents a long-term level, and the familiar yields close to or around 1% may not return, unless globalization picks up again and U.S.-China relations further ease. Therefore, I believe the main challenge these issues will pose to Trump is the midterm election in 2026. He must be very reluctant to see inflation rise further by then.

Compared to his previous term, I think the difference this time is that he was more rational last time, first reducing taxes and then addressing trade issues in 2018. This time, although he has four years of experience as president, many people now perceive him as more experienced, but personally, I think the environment he faces now is different from 2017. In 2017, the U.S. was in a low-inflation environment, bond yields were low, and the stock market was relatively inexpensive. Now, however, the environment he faces has changed. If he continues to approach things with his old mindset, he may find that the economic response differs from what he expects, so he actually faces significant challenges.

【Anchor】OK, thank you. That's all for this episode. Remember to follow us on YouTube or download our APP. I'm Yunfei Zhang, thanks for watching, and see you next time.

Anchor: Laura Cheung | Edited: Kelly Yang, Laura Cheung, Jerry Wang | Translate: Kato Ip | Proofread: Chris Liu

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