Transcript
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Speaker: This podcast was recorded for publication on the 4th of February 2025 by HSBC Global Research.
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Speaker: Hello, I'm Piers Butler and welcome to The Macrobrief.
Speaker: There's only one place to start.
Speaker: This week, President Trump announced his intention to impose sweeping tariffs on Canada, Mexico and China.
Speaker: This moved financial markets, sending them initially lower and the dollar stronger.
Speaker: And although the tariffs on Canada and Mexico have been delayed, China has retaliated with its own measures.
Speaker: It's a fast-moving situation, so to discuss where we stand now and the possible implications, here in London I'm joined by trade economist Shanela Rajanagam and Dara Mar, senior FX strategist.
Speaker: We also have Fred Newman, chief Asia economist, joining us from Hong Kong.
Speaker: Shanela, let's start with you and let's recap what's actually been announced and what's still being considered.
Speaker: That's right, Piers.
Speaker: There's been so much that's happened just in the last few days alone.
Speaker: But to take a bit of a recap, on Saturday, President Trump announced 25% tariffs on Mexico and Canada, a 10% tariff on energy imports from Canada and a 10% tariff on imports from China.
Speaker: In addition, he pledged to remove the de minimis treatment, which is basically a customs exemption for low-value shipments into the U.S.,
Speaker: from these economies.
Speaker: He also pledged to retaliate further if these countries do increase tariffs of their own on US exports.
Speaker: But there have been some developments since then.
Speaker: Notably on Monday, President Trump agreed with Mexico and Canada to delay their tariffs by 30 days following calls with leaders of both these markets.
Speaker: Basically, Canada and Mexico agreed to step up border enforcement to tackle illegal immigration and drugs flows into the US.
Speaker: However, that means that the 10% tariff on China did indeed go into effect.
Speaker: And as a result, China has retaliated.
Speaker: It's implemented its own tariffs, although they will only take effect on the 10th of February.
Speaker: It's also expanded export controls and has filed a complaint to the World Trade Organization.
Speaker: So, Fred, what do you make of China's response?
Speaker: So China didn't wait long to retaliate against U.S. tariffs, and they did impose some tariffs on imports from the United States, like coal and gas, for example.
Speaker: They also announced some export controls on things like tungsten, for example, which China is the dominant producer globally, and that's a metal product.
Speaker: or material used in the production of missiles, for example.
Speaker: So it's quite critical for global supply chains.
Speaker: But if you look closely, probably the measures that the Chinese government imposed are less comprehensive than what the U.S. kind of did.
Speaker: And that might actually hint at the Chinese government still keeping the door slightly open, maybe to a negotiated solution,
Speaker: So the Chinese government could have hit back much more, probably to these measures.
Speaker: But we're keeping out the hope that the two sides will be talking.
Speaker: And coming back to you, Shinela, how do we evaluate the broad economic implications and in particular the time lags associated with some of these measures?
Speaker: Well, it's very tricky because it really depends on what exactly takes effect and how long for.
Speaker: There's still a sense that because China's retaliation will only take effect on the 10th of February, that there could still be some room for negotiation.
Speaker: And even then, even if the tariffs do take effect, there could still be some time before the impact is actually seen
Speaker: in terms of consumer prices, but also the broader economic implications.
Speaker: In general, there was some front-loading ahead of potential US tariffs anyway in December and January, but it remains to be seen whether companies will continue to shift their supply chains, continue to shift ordering, and how that exactly will impact on businesses, but more broadly on the macro environment.
Speaker: What about Europe and the UK?
Speaker: There hasn't really been any announcements on that.
Speaker: Is that likely to be next?
Speaker: So there haven't been any formal announcements on Europe and the UK, but President Trump has made some comments regarding imposing tariffs, perhaps on both these markets.
Speaker: He's particularly concerned with the trade imbalance with the European Union.
Speaker: The US runs a large trade deficit with the EU of over $200 billion.
Speaker: And so it seems to me that he will increasingly want the EU to buy more American products and
Speaker: perhaps energy products like oil and gas.
Speaker: The UK, in some sense, is a bit sheltered from this because the US actually runs a small goods trade surplus with the UK, according to American data.
Speaker: However, there is certainly a risk that it could also come within the purview of future US tariffs.
Speaker: The good thing for the UK, though, is that it already has trade negotiations opened with the US, and that could provide some form of avenue or a means of expanding bilateral cooperation,
Speaker: and reducing any potential future duties.
Speaker: Dara, one area where there is no time lag is the currency markets.
Speaker: How has the dollar fared in all of this?
Speaker: And should we say that volatility is the order of the day?
Speaker: volatility has been at the heart of what we've seen in the currency market.
Speaker: To be fair though, I think actually the dollar has been, and the currency market has been pretty logically behaved, if you like, but volatile, right?
Speaker: But that's only because the headlines have been volatile and it's reacting to each nugget of information as it comes out.
Speaker: But if we get numbers or headlines that suggest that the US is about to impose tariffs, the dollar rallies, if we get a retreat from tariffs,
Speaker: the dollar sells off.
Speaker: So it's actually a pretty straightforward reaction function.
Speaker: The challenge is that's the only straightforward thing about all of this because we keep on getting these new signals, these new bits of information and turning the market on its head in minutes and seconds.
Speaker: So let's maybe step away a little bit from the sort of, as you say, headline reaction.
Speaker: I see three sort of main drivers at play.
Speaker: And how do you contend with them?
Speaker: Firstly, it's the continuing strength of the U.S. economy.
Speaker: Secondly, it's the Fed rate setting policy.
Speaker: And finally, it's the tariffs.
Speaker: How do you take all of those into account in getting to your foreign currency forecasts?
Speaker: Well, look, we're in the strong dollar camp and have been for some time.
Speaker: And the elements you list there are essentially all parts of the same outcome.
Speaker: U.S. exceptionalism, I think, is still evident in most of the economic data we're getting out of the U.S. and certainly relative to what we're seeing from the eurozone and to a lesser extent from the U.K.,
Speaker: Fed policy, we know they're on a pause.
Speaker: Now it's really only a question of how elongated that pause is.
Speaker: Again, that's supportive for the dollar.
Speaker: Now, tariff, of course, impacts both of those elements.
Speaker: You know, if the U.S. imposes lots of tariffs, does it act as a drag on U.S. economic activity?
Speaker: Is it inflationary?
Speaker: These are trade-offs the Fed will have to navigate.
Speaker: They're not saying really what they think yet because, like us, they're waiting for clarity on actually where all of this lands.
Speaker: But there's nothing we're hearing that I think kind of challenges our dollar bullishness in a big way.
Speaker: And if anything, if we begin to see a Chanel, you know, has raised the specter of tariffs on the likes of the eurozone and economy already struggling, it really can ill afford to have an export headwind coming from the US.
Speaker: And Fred, from a broader perspective, how has China's economic growth strategy evolved to take into account the threat of tariffs, not just from the US, but from other regions?
Speaker: As a result of the first Trump administration, when we saw the rise in tariffs, and to be fair, during the Biden administration, we also saw certainly an increase in trade restrictions in terms of imposed by the U.S. on imports from China.
Speaker: So it's been an eight-year process plus where we see actually the U.S.
Speaker: trying to wean itself off a little bit from imports from China.
Speaker: What China has done really is to redirect trade flows to other parts of the world, particularly Southeast Asia, which is now its largest export market, Europe in part, other emerging markets.
Speaker: And that's just a natural byproduct.
Speaker: In fact, Chinese exports have continued to reach record highs year after year after year.
Speaker: And so it's not as if China's export engine has completely been brought to a halt.
Speaker: The other thing that we see, apart from redirecting exports to other parts of the world, is we see Chinese companies invest much more in other parts of the world.
Speaker: So trade is one thing.
Speaker: foreign direct investment coming out of China into Vietnam, into Brazil, into Saudi Arabia is another element of the strategy of diversifying away from overly over-dependence on the U.S. as an economic market.
Speaker: And finally, Shanela, there are these so-called trade reviews taking place and due to be completed by the first of April, which almost seems too far away to think about given the short-term nature of all the trade announcements.
Speaker: But should we be focusing on them?
Speaker: Well, indeed, Pears, as we've seen recently, even a day can be quite long when it comes to tariffs and especially U.S. trade policy.
Speaker: But those reviews, I think, are quite important because it deals with strictly trade policy issues, whereas what we've seen recently is
Speaker: is all about tackling non-trade issues with tariffs.
Speaker: So the reviews, for example, they set out actions for the Trump administration to look into the causes of the U.S.'s large and persistent trade deficits, calls for a public consultation process to start,
Speaker: regarding the USMCA, the United States' trade agreement with Mexico and Canada, that review that's due by the middle of next year.
Speaker: And it also looks to investigate compliance of China with the phase one trade deal.
Speaker: So there could certainly be some actions and findings that come out of these reviews, perhaps leading to more tariffs and more trade protectionism, particularly with regards to China, but also Europe.
Speaker: Well, I think that's all we've got time for today.
Speaker: Shanela, Dara and Fred, thank you for joining us today.
Speaker: Thank you.
Speaker: Thank you.
Speaker: Thank you very much.
Speaker: So that's the story so far on Tuesday afternoon on the 4th of February, 2025.
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