Global markets brace for Trump’s trade war 2.0

Global markets brace for Trump’s trade war 2.0

As the inauguration of President-elect Donald Trump looms, global markets are already grappling with the looming threat of a fresh wave of tariffs that could reverberate across economies worldwide. Trump has pledged sweeping tariffs of up to 10% on all imports, with even harsher measures for China and neighboring trading partners. The ramifications are not just confined to the U.S. and China but extend far beyond, potentially reshaping trade flows, disrupting supply chains, and spurring retaliation from global powers.

Trump’s “America First” agenda has already delivered a seismic shock to global commerce in his first term, and experts predict that Trade War 2.0 will escalate tensions further. As Trump prepares to take office for a second term, the global economy faces an uncertain future, one where trade imbalances, tariffs, and retaliatory policies could provoke an economic freefall that upends decades of cooperation and multilateral trade agreements.

A new era of protectionism

In just days, the U.S. will inaugurate a president with a penchant for protectionist policies that have already caused significant shifts in trade relations, particularly with China. Trump’s administration is expected to impose tariffs on hundreds of billions of dollars’ worth of goods, a move that continues to prioritize reducing the trade deficit and bolstering U.S. industries. However, experts caution that the consequences of such actions extend well beyond the two nations.

Trade War 1.0, initiated in 2018, severely disrupted supply chains and weakened global economic growth. The imposition of tariffs on products from steel to consumer electronics was met with retaliation from Beijing, with both sides escalating measures in a tit-for-tat manner. The economic fallout was felt far and wide, with businesses struggling to manage rising costs and supply chain dislocations. Trade in the U.S. and China plummeted, and emerging economies with heavy reliance on these markets saw considerable slowdowns.

The stakes of Trump's second term

During his first term, tariffs were deployed not only as a punitive measure against China’s alleged trade malpractice but also as a means of forcing change in global trade dynamics. With a second term, Trump is set to escalate his trade policy. His campaign promises include universal tariffs on goods from all countries, reciprocal tariffs aimed at leveling the playing field, and sector-specific measures, notably targeting the automotive industry. While much of the focus will be on China, the broader international trade landscape could face significant disruption, especially for countries like Canada and Mexico.

Canada and the U.S. share a robust trading relationship, with nearly 65% of Canadian exports destined for the American market. Yet, as Trump eyes tariffs on imports from Canada and Mexico, the ripple effects will be felt in both countries’ economies. The Mexican peso, already weak following previous tariff threats, faces further instability, while the Canadian dollar is nearing four-year lows in anticipation of Trump’s tariff policies.

The economic fallout: A global perspective

A crucial aspect of the Trump administration’s tariff strategy is its potential to ignite retaliatory actions from affected nations. Already, China, Canada, and Mexico have warned of potential countermeasures that could send shockwaves through global markets. The trade war’s first iteration showed how interconnected the global economy had become, with businesses scrambling to adapt to shifting trade regulations. Companies reliant on Chinese manufacturing or U.S. consumers faced higher production costs, and many moved operations to avoid the tariffs.

Asia’s emerging markets, particularly Malaysia and Vietnam, faced the dual challenge of accommodating businesses fleeing China while grappling with strained labor markets and infrastructure. The global economy in 2024 remains fragile, and the specter of further trade disruptions could send it into a deeper slowdown. The International Monetary Fund estimated that the initial trade war shaved 0.8% off global economic growth in 2019—an already fragile economy could struggle under the weight of a renewed trade war.

Focusing on key markets: What’s at stake

• China’s fragility: China stands at the center of the impending trade storm, with its stock markets and currency already under pressure. The yuan has plummeted, reaching a 16-month low, while stocks have shown signs of instability. As Trump’s administration threatens to ramp up tariffs on Chinese imports, Beijing’s response will be critical in determining the course of the trade conflict. China's economic landscape, already weighed down by declining demand and geopolitical tensions, could face deeper challenges.
• Europe’s struggling currency: The euro has weakened by more than 5% since the U.S. election, reaching a two-year low of $1.02. Tariffs on both China and the EU would amplify existing economic challenges, with traders speculating that the European Central Bank could lower rates further to support the flagging economy. The eurozone’s economic slowdown, compounded by reduced Chinese demand for European exports, leaves the region vulnerable to further volatility.
• Canada’s vulnerable Dollar: The Canadian dollar is near its lowest level in four years, pressured by Trump’s threats of tariffs on Mexican and Canadian goods. A full-fledged trade war could push the loonie to even weaker levels, potentially triggering additional rate cuts by the Bank of Canada. The resignation of Prime Minister Justin Trudeau has only added to the uncertainty surrounding Canada’s political and economic outlook.
• Mexico’s volatile Peso: Mexico, already suffering from a 16% depreciation of its currency against the dollar in 2024, faces the prospect of further declines. The U.S. is Mexico’s largest trading partner, making it particularly vulnerable to Trump’s tariff policies. The uncertainty surrounding U.S.-Mexico relations, fueled by political and trade tensions, ensures that the peso will remain volatile in the coming months.

A world on edge

As the world braces for the next phase of the U.S.-China trade war and the potential for wider trade disruptions, the risks to the global economy are mounting. With supply chains already stressed and economic growth projections faltering, businesses and governments must prepare for a period of heightened uncertainty.

The outcome of Trade War 2.0 is unclear, but one thing is certain: the global economy is about to enter uncharted waters. Whether it emerges stronger or fragmented will depend on how well countries navigate this volatile era of trade wars, tariffs, and economic recalibration. The world’s markets are on edge, and the next chapter in the U.S.-China economic rivalry will shape the future of global commerce for years to come.