The Real Intention Of Trump’s Tariff Policy – Analysis

By Wei Hongxu

On November 26, U.S. President-elect Donald Trump stated on his social media platform that on his first day in office, he would impose a 10% tariff on all goods imported from China. Additionally, he would impose new tariffs of up to 25% on goods from Canada and Mexico. This statement further reinforced his commitment to fulfilling his campaign promises. As expected, this announcement triggered market fluctuations. The dollar strengthened, while the Chinese yuan, Canadian dollar, and Mexican peso all depreciated. Notably, the offshore yuan fell to around 7.26, returning to its low point from July.

Trump’s decision to announce his tariff policies before taking office came sooner than many had anticipated, catching the market somewhat off guard. As his presidency will only last four years, this means that Trump’s ability to implement policies will be more time-constrained than in his first term. Hence, he is likely to adopt a fast-paced approach to push forward his campaign promises, making full use of his time in office. On one hand, this reflects his determination to deliver on his campaign pledges; on the other hand, it also lays the groundwork for the Republican Party to secure future voter support. The urgency also signals his awareness of the challenges involved in pushing his policies through.

Regarding the reason for imposing additional tariffs, Trump stated that China has not taken sufficient measures to stop illegal drugs from entering the U.S. through Mexico. He said, “Until such time as they stop, we will be charging China an additional 10% Tariff, above any additional Tariffs, on all of their many products coming into the United States of America”. Additionally, Trump explained that the new tariff plan aims to pressure Mexico and Canada to take stronger measures to enhance border security and combat the export of fentanyl to the U.S. He emphasized that both countries have the right and ability to easily resolve these long-standing issues, and that they will face significant consequences for inaction before they take steps to address them.

These reasons reflect, on one hand, Trump’s urgent approach to addressing domestic issues such as drugs and illegal immigration. On the other hand, they indirectly reveal his “transactional” attitude toward tariffs. For Trump, tariffs seem more like a tool or weapon rather than a solution to the U.S. trade imbalance. As predicted by ANBOUND’s founder Kung Chan, Trump is unlikely to follow through on his campaign promise of a 60% tariff on Chinese imports. The actual tariff rates are expected to be much lower, depending on the outcome of negotiations between China and the U.S. The actual tariff rate could be significantly lower, depending on the outcome of negotiations and interactions between the two countries. Therefore, the proposed 10% tariff on Chinese goods may not be the final figure, but rather the starting point of a new round of trade negotiations, with room for further adjustments.

At the same time, Trump’s tariff threats, as he mentioned during his campaign, are not only directed at China but also aimed at the two neighboring countries, Canada and Mexico, with an even higher tariff rate of 25%. This has equally surprised the market. If implemented, this policy would mark a significant shift in the North American Free Trade Area (NAFTA) and indicate that Trump intends to overturn the United States-Mexico-Canada Agreement (USMCA) signed during his first term. It also reflects Trump’s broader isolationist stance on the international stage. In addition to pressuring Canada and Mexico on issues like immigration and drugs, the new tariffs are intended to encourage the return of manufacturing to the U.S. and promote American reindustrialization. This reflects Trump’s “America First” policy agenda.

During his campaign, Trump accused Mexico, China, Canada, and the European Union of taking advantage of the U.S. in past trade relationships, which indirectly undermines the USMCA. In fact, Mexico, with its low labor costs and geographic proximity to the U.S., has attracted significant investment from automakers and become a key player in North America’s automotive supply chain. As a beneficiary of the first round of the U.S.-China trade war, Mexico’s trade surplus with the U.S. has been expanding year by year. Currently, Mexico has become the U.S.’s largest trading partner and the second-largest source of its trade deficit. This is in direct contrast to Trump’s aim of reducing the trade deficit, promoting the return of manufacturing, and revitalizing the Rust Belt. Trump had previously suggested the possibility of singling out Mexico’s auto industry, imposing a 100% tariff on its exports to the U.S.

Therefore, Trump’s focus on Mexico also reflects his intention to address Chinese companies bypassing tariffs by entering the U.S. market via other countries, as well as his goal of pressuring American automakers to bring production back to the U.S. This highlights the complexity of the “trade war” between the U.S. and China. It is not only a matter for the two countries but also involves emerging markets like Southeast Asia and Mexico, which have become alternative routes for Chinese companies to access the U.S. market while avoiding trade war risks. In fact, by imposing a 25% tariff on Canada and Mexico, and an additional 10% on China, Trump effectively raises the tariff on the U.S.’s top three trading partners to a similar level of 28%-29%. For Chinese companies, rerouting through other markets to enter the U.S. becomes less meaningful. This may reflect Trump’s “equal treatment” approach to trade issues. From this perspective, Trump’s tariff policies still have the ultimate goal of reducing the trade deficit.

Trump’s tariff policy certainly signals that his “America First” approach is fundamentally different from the Biden administration’s “Small Yard, High Fence” strategy of “decoupling”. This may be more advantageous for China. However, despite Trump’s efforts to fulfill his campaign promises and gain the trust of American voters, it seems unlikely that he will be able to achieve his goal of reindustrialization through a global restructuring of trade and supply chains. After all, following decades of deindustrialization, the cost structure and environmental foundations of U.S. manufacturing have undergone significant changes. Even if Trump were to impose tariffs on all imported goods, achieving full reindustrialization would still be a formidable challenge. Similarly, as the market expects, the weaponization of his trade policy will have direct effects on both the U.S. dollar and inflation within the country. Changes in the domestic situation in the U.S. will likely impact the pace and intensity of Trump’s tariff-driven negotiations.

These actions are currently having a tangible impact on international capital markets, particularly the Chinese yuan, which has been continuously depreciating since Trump’s election victory. After the announcement of a 10% tariff on Chinese goods, the offshore yuan exchange rate fell to 7.26, returning to the level seen in July of this year. Of course, Trump’s current stance on tariffs, i.e., 10%, has a relatively mild effect on the yuan. However, the larger the tariff increase in the future, the more severe the impact on the exchange rate will be. Bank of America previously forecast that if the new U.S. administration imposes a 40% tariff on Chinese goods, the yuan could fall to 7.6 per dollar in the first half of next year. If the tariff were increased to 60%, the yuan might depreciate to 8 per dollar. Although exchange rate fluctuations will affect the valuation of China’s capital markets, the current 10% tariff seems to have a limited impact on the Chinese market. Ultimately, China’s capital markets will still be largely determined by the country’s own economic development.

In any case, the 10% tariff on China is likely just the beginning of a new round of “trade war”. Compared to Biden’s “Small Yard, High Fence” strategy, this new trade war will be more direct and broader in scope, targeting not just China but all countries. It will likely persist for a long time and drive the U.S. market toward greater independence. This signals that the future competition between China and the U.S. will remain a prolonged process, one in which both sides will suffer. The outcome will largely depend on the internal stability and development of each country’s economy. For China, responding to this new round of trade conflict will require more than just weaponizing tariffs. The focus should be on addressing the instability in domestic demand, resolving internal contradictions, and strengthening the internal circulation to overcome challenges in external trade.

Final analysis conclusion:

Before taking office, Trump publicly stated that he would impose tariffs on goods from China, Canada, and Mexico to address internal issues such as drugs and illegal immigration. This reflects Trump’s commitment to implementing his campaign promises and advancing his “isolationist” policy agenda, signaling that he views tariffs as a “bargaining chip. This move to initiate tariff negotiations can be seen as a warning for the start of a new round of “trade war”, a process that will likely be a long-term strategic struggle.

• Wei Hongxu is a Senior Economist of China Macro-Economy Research Center at ANBOUND, an independent think tank.