ANY change in US foreign trade policy towards China under President-elect Donald Trump will have serious implications but a comprise worked out under negotiations will be beneficial for both countries, according to Kasikorn Research Center.
While Mr Trump has set his sights on placing higher tariffs on Chinese imports, claiming that “Beijing has devalued the yuan to benefit its exports” and is a “currency manipulator,” the KResearch team pointed out that both countries are heavily dependent on each other.
President-elect Trump’s vow to raise tariffs specifically on Chinese imports, if implemented, would inevitably affect China’s export performance to the US. In a worst-case scenario, 45-50 percent of all Chinese exports to the US could be threatened. However, any plan for such a tariff hike might not benefit the US because many products imported from China do not have production bases within the US. That could drive up household expenses in the US, as well.
His call for US multinational companies to leave China will likely receive only a lukewarm response from those firms because the main objective for many of them towards entering China was chiefly to access the Chinese consumer market. Moreover, the likelihood that they would relocate to other countries looks slim because China – as the world’s most important labor-intensive production base – is the only foreign country that can infrastructurally accommodate their large production bases.
Since neither country would benefit if China imposed some forms of retaliation against the US after the implementation of a stern US policy on China, it is expected that the US might initiate a bilateral policy negotiation with China to improve American interests there.
This might include calling for Beijing to open its domestic market further, including investment, service, financial and financial service sectors. Meanwhile, China may seek to revaluate its currency in response to the “currency manipulation” accusation of Mr Trump because Beijing may not have a lot of bargaining power right now amid fragile Chinese economic performance.
Meanwhile according to a CNBC report, the dollar index has rallied to a near 14-year high because the dollar bulls like what they see on the interest rate front — and so far, from a Trump administration.
Meanwhile the euro is edging towards parity with the dollar with the help of diverging central bank policies.
“The markets had really mispriced the whole Fed story. Obviously Trump is a game changer. We have much more aggressive fiscal policy. Inflation pressures building, wage pressure building. A lot of this stuff is snowballing all at once,” said Win Thin, senior currency strategist at Brown Brothers Harriman.
The dollar index is up nearly 3 percent since the election of Donald Trump and is about 3 percent higher against the euro. It is sharply higher against emerging market currencies. For instance, it is up 8 percent against the Brazilian real. The Mexican peso has slumped 11 percent against the dollar since the election, on concerns that a Trump administration will ditch the NAFTA trade pact and be tough on illegal immigrants.
The greenback is moving higher with US Treasury yields, which have broken out of their 2016 range. The market is eyeing the possibility of more US growth and inflation, on Trump’s promise of a hefty infrastructure package and tax cuts. But there are still many unknowns including how hard a line Trump will take on NAFTA and more broadly on trade.
“Definitely we think the dollar probably has a bit more room to appreciate versus the emerging market currencies, probably versus the euro but not necessarily versus the yen,” said Andres Jaime, foreign exchange strategist at Barclays.
“For emerging markets, it’s very clear after Trump’s victory we have seen some re-pricing, with EM currencies going down on the view that anti-globalization, anti-trade would hurt the outlook for emerging markets, some of them heavily dependent on global trade and others that have relatively weak external accounts outlooks.”
The rising dollar and rising rates makes debt payments more burdensome for dollar-denominated EM debt. The euro was at 1.068 Wednesday afternoon and was last at parity with the dollar 14 years ago. Thin said if it breaks that level, the next target is sharply lower at 85.65 to the dollar.
The dollar was already heading higher on the idea the Fed would hike rates next month, but the election of Trump helped push that trade forward. Fed officials over the past week have also been pointing to December for a rate hike, as Fed Chair Janet Yellen might when she testifies on Thursday before Congress.
“Something that we do know is (some) of the main developed markets are moving toward a less integrated world. If you think that the emerging markets are the ones that have benefited the most from that, then the scenario is not one that would help emerging markets,” said Jaime.
Top: An interesting display at The Money Shop in the North Western Arcade, Birmingham. Photo: Elliott Brown (CC-BY-SA-2.0)
SOURCE: CNBC’s Patti Domm and Kasikorn Research