Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: This podcast was recorded for publication on 23rd of January, 2025 by HSBC Global Research.
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Speaker: Hello, I'm P.S.
Speaker: Butler and welcome to the Macrobrief.
Speaker: Donald Trump was sworn in as President of the United States this week and trade and tariffs are very much in focus.
Speaker: Although the president didn't impose any new tariffs during his first day in office, he did order a suite of trade reviews targeting China and other countries.
Speaker: So on today's podcast, we're assessing what these could mean and whether there could be more tariffs to come.
Speaker: I have in the studio with me Janet Henry, Global Chief Economist, Shanela Rajanagam, our Trade Economist, and Jing Liu, our Chief Economist for Greater China.
Speaker: Jing, Shanela and Janet, welcome.
Speaker: Thank you, Piers.
Speaker: Thank you.
Speaker: It's great to have you all on the podcast at the same time.
Speaker: So, Janet, can I start with you?
Speaker: I guess we can look at what we have learned since President Trump's inauguration.
Speaker: No tariffs were announced with immediate effect,
Speaker: but he has indicated there could be as soon as the 1st of February.
Speaker: And he has declared a national emergency on the southern border to try and stem the flow of immigrants.
Speaker: Where does that leave us?
Speaker: I think it means the story has evolved from the initial market reaction to the election when it was all about deregulation and tax cuts.
Speaker: The immediate actions on border control has already led to
Speaker: some expectation about impacts on the US labour market and what that will mean for growth and for inflation.
Speaker: And we have had those headlines on the intention potentially of imposing tariffs.
Speaker: So that 25% figure that's been mentioned with regards to Mexico and Canada, and also some headlines regarding Europe as well as China.
Speaker: And February the 1st being the date that's been indicated that
Speaker: that they could potentially be imposed.
Speaker: So it's kind of more moderate than was suggested last year.
Speaker: And adding, I think, to that expectation that it will be used as some kind of bargaining deal, whether it's related to drug control or immigration control or indeed to the overriding concern regarding trade deficits.
Speaker: So
Speaker: We can't react in terms of our forecast as quickly as the moves in the US dollar have done.
Speaker: But it has, I guess, you know, fueled some debate about what the inflation consequences and policy consequences will be.
Speaker: But at this point, perhaps not as aggressive as had been feared last year.
Speaker: And Chanel, if I can turn to you now, of course, President Trump's agenda for an America first trade policy is not just about ad hoc tariffs, but various trade reviews.
Speaker: Could you bring us up to speed as to what these entail?
Speaker: Which countries could potentially be the most affected?
Speaker: Yeah, that's right.
Speaker: So on Monday, President Trump basically signed a memorandum setting out his America First trade policy.
Speaker: So although we didn't quite get, you know, those day one tariffs, what he did set out does provide quite a good indication of his plans for the coming four years.
Speaker: And really, this is quite broad.
Speaker: So there were about nearly two dozen plans that he set out, various reviews and investigations,
Speaker: For example, looking to tackle the US's persistent trade deficits, looking to launch a public consultation ahead of the USMCA review that's due in July 2026.
Speaker: He's also talked about reviewing the trade deal with China to ensure that they are actually complying with that agreement that he signed the last time he was in office.
Speaker: And also he's talked about setting up an external revenue service to actually collect some of this tariff revenue among a suite of other measures.
Speaker: So it is quite comprehensive in terms of which countries or markets could be targeted.
Speaker: You do have the obvious culprits, Canada, Mexico, China, but also potentially the European Union, especially given that he's looking to retaliate with some tariffs around digital services taxes as well.
Speaker: So let's look at it from the perspective of the countries that are affected by these potential trade measures.
Speaker: How could they react?
Speaker: And I will turn to you, Jing, in a minute for your likely response in the context of Beijing.
Speaker: But Shalena, in your Trade in 2025 report, you showed that other countries have already benefited from a move away from China, such as Vietnam and Mexico.
Speaker: There's some quite striking charts as to how there's been a rebalancing of trade away from China into those countries.
Speaker: Could there be more in focus now?
Speaker: And what can we anticipate on the trade relations between Europe and the US?
Speaker: Yes, potentially.
Speaker: So I will say that there has been some reconfiguration that's already happened.
Speaker: So, for example, we look at import market share into the US.
Speaker: China lost import market share there in 2023.
Speaker: Mexico became its top import source.
Speaker: But then when you look at Chinese exports to Vietnam, to Mexico, to India, China,
Speaker: That's all increased by 100% or more since 2016.
Speaker: So very clearly, there's some degree of trade diversion, trade rerouting going on.
Speaker: And that's across a range of products as well.
Speaker: So you have the likes of Vietnam, Bangladesh, Cambodia, increasingly gaining import market share in key import products that China used to supply to the U.S.,
Speaker: But I will also say that the issue of transshipment is becoming increasingly important.
Speaker: So it could very well be the case that the new Trump administration, almost carrying on from what the Biden administration did, increasingly looks to crack down on some of this rerouting.
Speaker: And that means that some of these other countries, these third markets, could increasingly come into focus and be within the purview of new tariffs as well.
Speaker: So, Jing, let's turn to China.
Speaker: Given Chanel's comments regarding trade diversion away from China, how important is trade with the U.S. these days?
Speaker: So I was listening to your colleague, Fred Newman, our chief Asia economist, saying in a presentation that exports for China accounts for only 15 percent of GDP.
Speaker: And that's down from 30% in 2006.
Speaker: And within that, the shipments to the U.S. now take up just 2.5% of China's GDP.
Speaker: So how significant is it really?
Speaker: I think if we just purely look at the number, it sounds like it's not so significant.
Speaker: But don't forget that China actually managed to grow, you know, in terms of the technology know-how and many other things through the trading sector.
Speaker: And also nowadays, U.S. and China have a lot of...
Speaker: integration in other areas, like the collaboration on science technology, maybe slightly less over the past several years, and also collaboration on other global issues.
Speaker: And a lot of U.S. companies are operating in China and vice versa.
Speaker: So I think U.S. is still very important to China through and beyond the trade channel.
Speaker: So based on that response, how will Beijing respond to any U.S. tariffs?
Speaker: I think this time might be very different from last time.
Speaker: Last time we witnessed the escalation very quickly.
Speaker: Beijing,
Speaker: had adopted TIFO TAT.
Speaker: Now the trade tension is not merely between US and China.
Speaker: Other trading partners of China also show concern about China's rising export competitiveness, which means if Beijing retaliate in a hard way, then other trading partners are worrying about flooding of Chinese goods into those markets.
Speaker: So Beijing need to be mindful
Speaker: about how to deal with external pressure.
Speaker: And I think that's a catalyst for China to shift its focus to supporting the domestic consumption.
Speaker: And Janet mentioned earlier that global trade growth could slow in the coming year.
Speaker: So how is China going to boost its economic growth if it's not from exports?
Speaker: In 2024, we saw several policy initiatives, but so far they proved insufficient.
Speaker: What else could the government and central banks do?
Speaker: I think, first of all, this year we probably will see more serious measures being delivered.
Speaker: For example, around the beginning of the new year, we already hear reports about the increase in civil servant salary.
Speaker: And senior officials from China also promised to
Speaker: increase the basic pension, several provinces start to lift the minimum wage, and so on and so forth.
Speaker: So those can help with supporting the consumption.
Speaker: Other than that, for the first time, stabilizing housing market is written in the policy document, which means we can expect more measures to be handed down.
Speaker: If the housing market can stabilize, I think from the wealth effect perspective, that's also conducive for supporting the consumption.
Speaker: I guess one of the frustrations from market observers was an expectation that the Chinese authorities would announce much more dramatic measures.
Speaker: Could that be the case when they announce their next five-year plan?
Speaker: It's going to be the 15th one.
Speaker: And when is that due to be announced?
Speaker: Normally, it's toward the end of the 14th five-year plan, so that would be toward the end of 2025.
Speaker: But those are mostly the long-term kind of structural reform.
Speaker: Also very important, but probably not in the same type of bazooka stimulus the market is always looking for.
Speaker: And more immediately, Jing, what do you think that we might see in terms of monetary policy?
Speaker: Clearly, a lot of the Trump policies regarding immigration control tariffs has led to some concerns about inflation that the Fed may have to react to.
Speaker: The dollar's already quite strong.
Speaker: How constrained will the Chinese authorities be about being able to ease monetary policy?
Speaker: What do you expect in the coming months?
Speaker: Sure.
Speaker: Actually, China said it will adopt a moderately loose monetary policy.
Speaker: It doesn't sound so exciting, but in reality, this is the most proactive phrase they use over the past 15 years.
Speaker: So PBOC is set to loose its monetary policy.
Speaker: We forecast a 50 basis point RRR cut, 30 basis point rate cut.
Speaker: That's actually exactly what you mentioned.
Speaker: The
Speaker: Fed uncertainty in the rate cut might constrain PBOC from that perspective.
Speaker: However, China will look to use more quantitative tools.
Speaker: For example, the PBOC can resume bond purchase from the secondary market once Ministry of Finance issue more treasury bonds.
Speaker: So, Janet, China may be set to ease monetary policy, but does the new U.S. administration's intended policy mix change the outlook for interest rates in the major advanced economies?
Speaker: On our live insights that we did last week, we talked about what...
Speaker: keeps you awake at night, risks that are sort of outside of your central scenario.
Speaker: And you mentioned central banks reversing course, raising rates.
Speaker: And in fact, there was a survey on Bloomberg which put that probability based on the respondents at 25%.
Speaker: That seems awfully high.
Speaker: Are they overreacting or what's happening here?
Speaker: Well, we know that the risks of a reversal have risen.
Speaker: You know, rates have been falling.
Speaker: Well, policy rates have been falling.
Speaker: Long term interest rates haven't been.
Speaker: And the Federal Reserve will have to respond to the data.
Speaker: So depending on how these immigration and trade policies impact on the growth inflation mix, the Fed will set policy appropriately.
Speaker: We're certainly looking for at least some more modest easing in the course of 2025.
Speaker: But the other topic is how loose is US fiscal policy going to be?
Speaker: We're not looking for a massive fiscal stimulus in 2026.
Speaker: But if we're underestimating what comes through, then yes, there is absolutely something that the Fed would have to respond to if it led to a stronger rebound in US growth and inflation.
Speaker: And if I can make one forecast, which I'm sure will come true, is that you're all going to be very busy.
Speaker: So for now, thank you very much for joining us on the podcast.
Speaker: Thank you very much, Fiers.
Speaker: That was Janet Henry, Jing Liu, and Shanela Rajanagam on the potential impact of tariffs.
Speaker: Clients of HSBC can find all the related reports on the topic on our website at research.hsbc.com.
Speaker: And if you have any questions or comments about anything we've talked about today, please email us at askresearch at hsbc.com.
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