While the world tries to guess the real intentions and direction of the new American administration’s economic policy, markets are betting on the return of the trade war. And if, on the one hand, everyone is keeping an eye on China, the biggest loser could actually be the old continent
Tariffs, invasions and interest rates are bluff or reality? Donald Trump has not yet taken office, but the world is thinking about nothing else. The words of the future American president continue to shake the markets, which are trying to anticipate what could be coming in the next four years. China, Europe, Canada and Mexico are the main “victims” of the promises of economic pressure and this is already being felt. Experts warn that the economic clash is inevitable and that, despite not being the main target, Europe could even become the main victim.
“Tariffs are not bluff. This is a thought out strategy. Donald Trump has a classic protectionist economic agenda to protect American products by taxing foreign products. The economic clash will indeed happen and China will, without a doubt, be the main target. However, the main victim will be Europe”, warns professor Tiago André Lopes.
Trump’s campaign promises are particularly tough on China. The American president-elect suggested raising customs duties to 10% on all imports and a 25% surcharge on products from neighboring Canada and Mexico. But it’s China that the next US administration has its eye on. Upon his return to the White House, Trump insists on imposing a 60% tariff on all products imported from China.
Despite not having arrived on the scene yet, markets are taking Trump’s threat very seriously. The Chinese stock market is falling and the yuan has been losing value sharply since the American elections, reaching its lowest value in the last 16 months when compared to the dollar. In reaction, the Chinese stock exchange asked major Chinese fund managers to restrict their share sales and the Central Bank took immediate measures to prevent the yuan from losing any more value against the dollar.
If Trump makes good on his election promise, these tariffs could have a much more aggressive effect on the Chinese economy than they had during his first term. The China of 2025 is in a much more vulnerable position today than in the past. Xi Jinping’s government finds itself dealing with a crisis in the real estate sector – once the engine of Chinese economic growth -, a debt crisis and weak demand in the domestic market. To make matters worse, this scenario is creating strong deflationary pressures in the Chinese economy, which could worsen if the gigantic demand in the North American market drops significantly.
Difficult choices
In the middle of this economic hurricane is the European Union. Markets predict that the old continent will be one of the main ones affected by Trump’s return, with the common currency falling 5% since the presidential elections to the lowest of the last two years. This is because the United States of America is the European bloc’s main trading partner and because investors believe that the Federal Reserve will increase interest rates again, due to higher inflation than expected, which makes the dollar more attractive.
Despite not being the main target of Trump’s new trade war fury, IGN analyst Francesco Pesole believes the European Union will be particularly harmed by a “very toxic combination.” The European bloc has one of its main export markets in China and a weak Chinese economy will represent significant losses for Europe. At the same time, Trump threatened that if Europe did not buy more North American gas and oil, it would attack with more customs duties, which could further complicate the situation.
“The European Union will have to start making very difficult choices. We have to think about what we are going to do. What do we do in terms of energy if we want to move away from the US commercially? We gave up on Russian energy and are now dependent on the USA”, insists Tiago André Lopes.
And no sector would be as exposed to a trade war with the United States and a drop in demand in China as the European automotive sector, which is the engine of the continent’s two main economies, Germany and France. Just over a week ago, several European stocks in this sector fell more than 5% when the Washington Post reported that the new administration might be considering reducing customs duties on critical imports. But the anticipation only lasted a few hours, with the price falling again after Donald Trump rejected this idea on his social network, Truth Social.
“The reindustrialization of Europe should have already begun in earnest at the time of the pandemic. The Draghi plan is not a magic formula, because the bill is very expensive. We need António Costa to call Trump on January 21st [um dia após a tomada de posse] to discuss economic policy in the coming years. It is necessary to sign an agreement”, argues Tiago André Lopes.
Neighborhood in trouble
But it is not just the main economic blocs that risk significant losses. Americans’ neighbors also fear the worst. The new administration will take office with a promise to place a 25% customs tariff on Canada and Mexico if they do not stop migrants and drugs from entering the country. The Canadian situation is particularly fragile with the resignation of Prime Minister Justin Trudeau after nine years in power.
The Canadian dollar reached its lowest level in four years in November after Trump threatened tariffs against the country. Still, Goldman Sachs analysts cited by Reuters believe that there is “only” a 5% chance of these measures eventually materializing, although others completely reject that they will happen.
A different situation is that of Mexico. Donald Trump’s first term saw Mexico as one of his main targets for his most aggressive foreign policy. The administration negotiated an agreement with the then Mexican president that aimed to stop the flow of migrants arriving in the country from Latin America. To do so, Donald Trump threatened to use the International Economic Emergency Powers Act, an instrument that gives the American president powers to manage imports during a national crisis.
For Mexico, the trade relationship with the United States is absolutely fundamental. Approximately 80% of Mexican exports are destined for the North American market and the new threat of customs duties is causing panic in the markets, with the Mexican peso falling significantly since the election of Donald Trump.
“I believe that, unlike China’s customs duties, threats against Canada and Mexico are a way of putting pressure on these countries. Donald Trump is alienating the relationship with Canada at a time when Trudeau’s most likely successor is a conservative and a potential Trump ally. In Mexico the situation is different and I believe they will have a troubled start to relations”, highlights Tiago André Lopes.
