These announcements have already rattled global markets, causing a notable decline in Asian currencies. In an exclusive interview with CNBC-TV18, Eswar Prasad, Professor of International Trade Policy at Cornell University, offered his perspective on the potential shifts in US trade policy, China’s response, and the broader implications for the global economy.
While it remains uncertain whether Trump will implement these tariffs to the extent he has suggested, Prasad pointed out that even modest tariff increases could have far-reaching consequences. These measures might compel US trading partners to respond with their own protectionist policies, thereby exacerbating global trade tensions and potentially triggering a worldwide trend of restrictive trade practices, Prasad added.
According to Prasad, China’s growth has increasingly depended on exports, particularly as domestic demand remains weak. Although the US has become less central to China’s exports compared to previous years, Prasad believes that “higher tariffs at a time like this, that limit exports to one of the key export markets, could put additional strain on the Chinese economy.”
While currency depreciation might seem like a straightforward response for China, Prasad warned of the potential risks, stating, “If China were to initiate a cycle of currency devaluation, it could spark an outflow of capital, potentially setting off a spiral of depreciation and capital flight.” Instead, Prasad expects that China will likely rely more on fiscal stimulus and monetary easing to stabilise its economy.
For the US, Trump’s policy approach promises short-term economic growth, driven by income tax cuts and a higher fiscal deficit. Prasad noted that this strategy could boost the US economy, as its relative insulation from global market turbulence allows it to pursue growth on its own terms. Stock markets, already buoyed by expectations of a more lenient regulatory environment, are poised to benefit further, Prasad said.
Looking forward, Prasad cautioned that the global implications of Trump’s trade policies may extend beyond short-term market reactions. Rising tariffs and retaliatory measures from other nations could foster an increasingly fragmented global trading system. Although the full impact on world trade remains to be seen, Prasad suggested that Trump’s moves, even if moderate, could “put a crimp on world trade and lead to a place where protectionist moves begin to emerge around the world.”
Below are the excerpts of the discussion.
Q: One year from now, do you think there could be a lot of chaos in international trade with tariffs and counter-tariffs?
Prasad: Chaos is certainly the phrase of the hour. There is going to be a lot of unpredictability in US policymaking. One question is whether many of the campaign promises that Trump made over the last year or so, are they going to be translated into policy actions or if these have to be seen as threats that essentially bring other countries to the table and play the way Donald Trump wants them to play.
He has certainly made a strong commitment to increase tariffs across the board, and especially to increase tariffs to a very high level against China.
I suspect we will see at least some movement on tariffs. Now whether he is going to raise them to the extent he has talked about, whether these are going to be across the board remains to be seen. However, it certainly creates a lot of uncertainty among US trading partners and for the global trading system more broadly because Trump’s moves even if they don’t turn out to be very significant tariff increases, they are going to put a crimp on world trade and could lead us to a place where we have protectionist moves beginning to emerge around the world.
Q: What is your base case in terms of a Chinese response? The market is guessing that China will depreciate its currency to account for at least part of the tariffs increasing prices of their products. Do you think that will be China’s reply?
Prasad: The Chinese economy is in a very difficult position now relative to the previous time Trump was in office, and we had similar issues on the table. Right now the Chinese economy is not doing well and over the last couple of years in the post-COVID period, one of the key drivers of growth in China has been investment. Domestic demand, especially household demand, has been relatively weak, so we have a bit of an imbalance between the increase in supply and weak demand, so China has been relying on exports to a good deal to power its growth. So tariffs at a time like this, that limit exports to one of the key export markets could be important.
Having said that, the US has become a less important export market for China over time, at least directly, although there are some exports going through Mexico and Vietnam to get around some restrictions on Chinese direct exports to the US. So it’s not as important as it used to be, but at a time when the Chinese economy is vulnerable, this certainly is a concern. So we’re going to see a series of policy responses from China.
I think the currency is one that they cannot use to a great extent because there is a risk that if they do start a cycle of currency depreciation at a time when their economy is weak and confidence is weak, you could see a large surge of capital outflows that becomes very difficult to manage if that sets off a capital outflow currency depreciation spiral. But certainly a little bit of currency depreciation will help, but I think we will see a significant amount of stimulus from the Chinese government. We’ve already seen a number of measures to ease monetary policy, cutting interest rates, making credit more widely available, and I suspect that is going to be supplemented with a significant amount of fiscal stimulus to prop up the economy.
Q: The way the markets have pushed up US stocks, it is betting on very good growth in the US itself, probably because of lower taxes, a higher fiscal deficit, both of which are growth stimulating. So do you think in calendar 2025 itself, growth may be good in the US? Is that a bet to take?
Prasad: The US economy has proved pretty robust over the last few quarters, despite interest rates being held at fairly high levels until this past summer, and that momentum is likely to continue. The US is somewhat insulated from what happens in the rest of the world. So it can power itself along, and certainly some of the measures that Trump has talked about, which are likely to widen the deficit, will have a short-term stimulative effect.
One of the reasons I think we are seeing stock markets in particular doing so well is not just a bet on growth, but also a bet on a much looser regulatory environment, which could be very good for corporate earnings. So that, I think, is one of the reasons why, independent of what happens in terms of growth, stock markets have really gotten a boost from this election outcome.
Having said that, I think the fundamental strengths of the US economy are likely to remain. And if we move to an environment where interest rates are lower, where there is some fiscal stimulus along the pipeline, and we switch to a looser regulatory environment, certainly in the short run, that is all going to be good for growth.
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