In his anticipated second term, former President Donald Trump is expected to leverage tariffs, not as a long-term protectionist strategy but as a bargaining chip to secure a grand deal with China.
Contrary to the common narrative of escalating trade wars, strategists believe that Trump’s ultimate goal is to realign the US-China trade relationship, potentially inducing significant Chinese foreign direct investment (FDI) into the United States.
Historically, tariffs have been a favored tool in Trump's economic playbook, used to pressure trading partners into negotiations.
However, strategists from BCA Research suggest that Trump's tariff strategy in his second term will be fundamentally different from the one employed during his first term.
“Former President Trump intends to use tariffs in his second term, but with the aim of making a grand bargain in China. Such a bargain would, surprisingly, include inducing Beijing to surge FDI into the US,” said analysts at BCA research in a note.
Trump's recent speeches, including his address at the Republican National Convention, indicate a shift in his approach. He mentioned tariffs only twice during his 2024 convention speech, a stark contrast to his earlier rhetoric.
Importantly, these mentions were in the context of forcing China to relocate its manufacturing operations from Mexico to the United States. This indicates a pivot towards using tariffs as a means to compel China to invest directly in the American economy, rather than merely penalizing Chinese imports.
The concept of a "grand bargain" with China underlines Trump's strategy. Such a deal would likely involve China agreeing to ramp up its investments in the U.S., particularly in sectors that create jobs and bolster American manufacturing. This mirrors successful trade negotiations from the 1980s, where economic concessions were traded for favorable terms.
Analysts argue that China's current economic strategy aligns with Trump's goals. Faced with increasing economic risks and a need to diversify its investments, China may be more inclined to negotiate a deal that benefits both nations.
The surge of Chinese FDI into Mexico as part of its de-risking strategy demonstrates Beijing's willingness to move capital abroad. Trump's strategy would aim to redirect these investments into the U.S. by offering China favorable trade terms in exchange.
For investors, Trump's tariff strategy presents both risks and opportunities. The initial rhetoric of renewed trade tensions could trigger market volatility, particularly affecting small-cap stocks and the U.S. dollar. However, analysts advise investors to remain cautious and avoid making hasty decisions based on early trade war fears. The belief is that Trump’s strategy will ultimately lead to a resolution rather than a protracted conflict.
Investors are encouraged to "fade the hysteria" surrounding Trump's tariff threats and instead focus on the long-term implications of a potential deal with China.
If successful, such a deal could stabilize the U.S.-China trade relations, attract significant foreign investment, and bolster sectors like manufacturing and technology in the U.S.