Trump’s Trade Strategy in His New Presidency
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Now that Donald Trump is once again President of the United States, it appears he plans to spend the first two years reigniting a trade war—this time, with the aim of accumulating national wealth and weakening the economic structures of competing nations. He is expected to take steps toward dollar devaluation in order to regain America’s relative trade advantage. Trump is determined to exert heavier pressure on nations that benefit freely from U.S. actions, seeking to ensure that America’s contributions are no longer costless.
The method for calculating these tariffs isn’t necessarily about achieving “fair trade” or balancing trade deficits. Rather, it aligns with competitive conditions. In other words, Trump’s administration views tariffs not just as responses to unfair practices by others, but as strategic tools to compensate for America’s trade deficits.
However, Trump may have chosen one of the worst possible times to begin a new trade war. The economic environment today is quite different from his first presidency. Back then, inflation wasn’t a concern. Without today’s high inflation, markets would likely be more tolerant of his trade moves. But now, under current conditions, Federal Reserve policies have already capped expectations for rate cuts. For example, inflation expectations for the next 12 months have risen to 6.2% as of March. Given this, the Fed is unlikely to cut interest rates easily.
Market Concerns About Economic Growth and Inflation
Markets are now worried that if economic growth slows down, the Federal Reserve may not be able to cut interest rates quickly—because inflation remains above its target. When aiming for balanced monetary policy and avoiding a recession, you need monetary flexibility. However, at present, due to high inflation and prevailing uncertainties, such flexibility does not exist.
Additionally, weak PMI data from the U.S. and high inflation expectations measured by the University of Michigan have reached the highest level in 30 years. A PMI index below 50 indicates ongoing mild recession in the production sector.
Recent developments in manufacturing and services PMIs show a deeper economic slowdown, mainly due to policy uncertainty. The imposition of tariffs has not only increased costs for producers, but also disrupted natural trade planning. As a result, ripple effects are becoming evident: weaker demand, reduced hiring, cautious investment, and a slowdown in the services sector—all despite its historical flexibility.
As long as trade tensions remain unresolved and there is no clear direction for long-term policy, it is likely that new uncertainties will continue to unsettle market sentiment. Prolonged commercial anxiety can intensify and increase the risk of deeper economic contraction. Currently, PMI data is sending a clear signal: confidence is fragile, and growth is slipping away.
However, these trade tensions are naturally triggering both mild and intense reactions from other nations. Trump’s willingness to impose tariffs on currency-devaluing countries makes it clear that he sees exchange rates as a tool for negotiation power. He has openly stated that he will fine countries for weakening their currencies. At present, the offshore yuan is depreciating, and if this trend continues, the yuan must be further devalued to maintain competitiveness. As a result, markets may re-enter a risk-off mode. The USD/CNY exchange rate recently reached 7.30 for the first time—clear evidence of continued yuan weakening. China has already imposed tariffs on U.S. coal and agricultural equipment, and also raised tariffs on certain vehicles. Additional measures—such as restrictions on exports of critical materials like gallium and germanium—are clearly aimed at protecting China’s strategic industries in electronics, renewable energy, aerospace, and pharmaceuticals.
This decision could create disruptions, especially for companies relying on inputs like display panels and touchscreens, leading to supply shortages throughout the global production chain.
The automotive, alloy steel, and defense-medical equipment sectors are also facing challenges due to higher production costs. Despite being the largest supplier to the U.S., China’s exports to the U.S. have sharply declined since 2018, largely due to trade wars.
China’s Structural Challenges Amid Economic Pressures
China is also facing many challenges, particularly as risks related to growth and inflation continue. Despite ongoing monetary constraints, inflation remains low while economic momentum weakens. This has led to oversupply and surplus capacity in the housing sector.
Given the low inflation rate, real interest rates in China are high, making borrowing expensive. As a result, the overall appeal of investing in real estate has diminished. A significant oversupply in small cities has led to unsold or vacant housing stock—some of which have become known as “ghost cities.” These developments are putting intense pressure on the construction sector, which is a major part of China’s economy.
In response, China’s central bank (PBoC) announced that it would offer financial support, including liquidity injections and funding through sovereign wealth funds such as Huijin, to help stabilize the stock market. This move suggests that PBoC is intervening indirectly to support equities—similar to previous actions by Japan’s central bank (BoJ), which purchased ETFs in past years.
The strategy includes liquidity support and state-backed financial institutions purchasing assets during market downturns. For China, this applies to industries such as steel, panels, and electric vehicles. However, despite these efforts, domestic demand remains insufficient.While China has made progress in sectors such as semiconductors and green technologies, its long-term potential is under pressure due to trade tensions and demographic decline. Growth in both population and productivity has slowed under intense scrutiny.
Canada also intends to bar American companies from accessing government contracts—a move targeting U.S. firms operating in Canada. While the Bank of Canada remains concerned about recessionary effects caused by tariffs, it is unlikely to act hastily in lowering interest rates. Canada’s economy is influenced heavily by U.S. trade policy, and monetary policy decisions will likely depend on how sharply the economy slows. If economic data points to more significant declines, the likelihood of further rate cuts will increase in the future.
On the other hand, the UK is taking the opposite approach. The British government has decided not to retaliate against new U.S. steel tariffs, showing a clear preference for diplomacy and negotiation. This stance indicates that the UK is seeking a solution through dialogue, rather than through reciprocal trade actions.
Global Repercussions of U.S. Tariff Policies
The issue of retaliatory tariffs is likely to have broader consequences for other U.S. trading partners, including countries like India and those in Southeast Asia. The concept of “reciprocal tariffs” implies heightened tensions, especially with nations that already impose digital taxes or maintain non-tariff barriers (e.g., France) that restrict U.S. market access (such as China limiting access to American firms in specific sectors).
However, most countries may try to avoid full-scale retaliation. They might:
Lower their own tariffs;
Produce goods within the U.S. to avoid border taxes;
Purchase raw materials and components (such as LG batteries made inside the U.S. by Toyota) from U.S. sources, as a strategy to gain trade favor and help reduce the U.S. trade deficit.
Market Outlook on Tariff Scenarios
Overall, markets and institutions envision three levels of tariff imposition by the U.S. Level one—tariffs around 10%—is considered relatively mild and likely to ease market risk. The next level—around 20%—is seen as neutral and expected by markets. However, tariffs above 30–40% would indicate a severe scenario, negatively impacting markets and economies. This is the level markets fear if no trade agreements are reached.
The Trump administration has used tariffs as both a political and economic tool. While the current high-tension climate is on hold pending negotiation outcomes, markets are cautious. Trump may use tariffs and rhetorical pressure as diplomatic leverage. Tensions with China remain elevated, and the market fears a base tariff rate exceeding 50%, possibly reaching over 100% in extreme scenarios.
High tariffs may target a wide range of products, including Trump’s vehicle-specific tariffs, computers, laptops, and even desktops. This would include goods expected to be imported into the U.S. worth over $138.5 billion in 2024—some of which were never previously subject to tariffs. This could mark a major shift and bring a wave of uncertainty to U.S. and global technology markets.
Unfortunately, the world is moving toward greater fragmentation and the polarization of global supply chains. Global trade is increasingly split between geopolitical blocs—on one side, the West (including the United States, the European Union, and Japan), and on the other, countries aligned with China and Russia. This global polarization is leading to parallel systems: for example, the emergence of financial systems like China’s CIPS as a rival to SWIFT, and competitive technological platforms. China, under U.S. leadership, now faces restrictions in areas like AI and 5G. Alongside these, countries are imposing more export controls and trade barriers, significantly disrupting international trade. However, it will take time to fully assess the long-term effects of tariffs and structural shifts in global trade.
Amid this transformation, global supply chains remain complex and tightly interwoven. The electronics and semiconductor sectors are still dominated by a few countries. For instance, while many components are manufactured in Taiwan, South Korea, and Japan, much of the product design still takes place in the U.S. Meanwhile, final assembly and production are heavily concentrated in China, with countries like India active in pharmaceuticals and raw material production.
In agriculture, the situation is similarly complex. Key producers like the U.S., Brazil, and Russia have high-cost advantages. In the end, energy supply chains remain highly strategic. The world still depends on OPEC+ members, and China’s influence continues to grow in managing oil, gas, and fuel flow—securing a global role in energy markets. At the same time, China has deep control over the production of batteries, solar panels, and many critical raw materials.
What Is the Federal Reserve Aiming For?
As the economy reaches completion, the Federal Reserve adjusts its policies to optimally support its dual mandate: maximum employment and strong economic growth (real GDP). If the market softens and inflation slows faster than expected, the Fed could shift its policies accordingly. Based on this logic, the Fed may lean toward cutting interest rates in the future to facilitate continued economic expansion.
However, there is still no strong sign of immediate urgency to change course. Until job growth significantly weakens, the economy will likely remain in motion. Consumer demand and pricing are still robust, meaning businesses aren’t yet laying off workers en masse or halting investments. For now, the Fed is proceeding cautiously.
That said, the Fed is paying close attention to this type of data, as it could signal whether short-term interest rate cuts are warranted. The presence of uncertainties means they are likely to approach future decisions with even more caution.
The Broader Consequences of Labor Shortages
If there is a decline in the workforce within key sectors like public infrastructure and social services, it could lead to widespread political and economic consequences. The U.S. labor market might face new pressures. Such developments could become central in future political and economic debates.
A reduced workforce in vital sectors like infrastructure and public services has deep social and economic implications. For instance, when there aren’t enough workers to build or maintain essential public infrastructure, progress slows, and long-term development suffers. These services form the foundation of public welfare—everything from transportation to education and healthcare.
A shortage of public workers weakens the economy and erodes citizens’ day-to-day quality of life. If the government cannot provide essential services or maintain infrastructure, public dissatisfaction grows. Such a situation can severely undermine trust in public institutions and the state’s capacity to deliver quality of life.
In an election year, these gaps may become a major political issue. Governments might be forced to prioritize budget allocations for infrastructure and welfare services like healthcare, education, and protection—especially in light of declining satisfaction and mounting public pressure.
The Fed’s Cautious Outlook on Monetary Policy
The Federal Reserve believes it is on the right path and emphasizes that monetary policy should not ease prematurely to avoid reigniting inflation. The Dot Plot—a chart reflecting the projections of Fed members—shows that two rate cuts are still projected for this year. However, the Fed is taking a “wait and see” approach, indicating there is no urgency to lower rates unless economic data demands it.
The current strategy is one of patience and observation. Fed Chair Powell has reiterated that “we’re not in a hurry,” a phrase that has become a key signal from the Fed. Unless there is a dramatic shift, significant changes in monetary policy are unlikely.
Still, markets are interpreting Powell’s wording as a subtle indication that a rate cut might be near. They expect that if action is taken (likely a rate cut), it will reflect growing confidence that the U.S. economy remains strong, with high certainty in current conditions, and that markets are steady and balanced.
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