Speaking to CNBC-TV18, Jahangir Aziz of JPMorgan noted that Trump’s primary focus will likely be on tariffs, immigration, fiscal policy, and regulation, with significant implications for Asia’s economies, including India.
Aziz believes as Trump prepares to take office on January 20, his administration could act quickly on tariffs and immigration.
Unlike fiscal policy changes and regulatory reforms, which require legislative approval and time, tariffs and immigration restrictions can be implemented through executive orders, making them simpler and faster to enact.
“The biggest unknown is how business sentiment is affected and how capital spending reacts to it,” Aziz said pointing to the real impact of tariff changes.
These are the edited excerpts of the interview.
Q. The big theme of Trump’s campaign was that he will bring income tax to zero, and fund the budget with tariffs. To what extent will he actually cut taxes and replace it with tariffs?
A. It’s very hard to say how much of that office campaign promises he will keep, but let us not forget that President Trump is someone who has broadly kept to his promises. I think there are four separate areas where policies will be very different that affects the economy. One is obviously tariffs. The other is immigration, the third is fiscal policy, and the last is regulation.
There’s also a question about agency appointments, but that is somewhat less related to economics per se. It could be when the three members of the Fed who are up for reappointment in 2026 we shall see how that plays out. But right now, it’s broadly these four areas.
I think there is a sense and a belief, not only by President Trump, because he’s spoken about it a number of times, but in our own conversations, in things that the people around President Trump have been saying, there is clearly a belief that these are swappable things.
Q. Trump takes office on January 20. Will he raise tariffs immediately?
A. Of all the things that we spoke about, fiscal and regulations clearly will take time. But the two places where not only we have seen some sense of urgency by the Trump administration, but also is doable, are tariffs and immigration, because neither of them really require any legislative approval. The approval is already there so they can be done with executive orders. And tariffs is where there is least complication.
Immigration restrictions are also less complicated. But mass deportation is going to take some planning and time to implement. Restrictions in immigration and tariffs definitely are things that we are eyeing as things that can be done very quickly under the new administration.
Q. Are you already bringing down your growth forecasts of either the global economy, or at least for Asian economies?
A. It’s complicated. Let’s say, there is a set of tariffs being imposed. Most likely, it is going to be targeted on China. But I wouldn’t be surprised if other countries like Malaysia or Vietnam or others in ASEAN, where there is some degree of Chinese transshipment, is also the target. That’s what the playbook was in 2018. That would clearly affect through China, not just China, but EM Asia. However, there are two other things that emerging market countries are already being shocked with, which is where we as economists think we need specificity. We need to see what the exact policies are.
The market isn’t waiting for us. The market is already pricing in the direction of fiscal policy, the direction of deregulation and the direction of tariffs. And you can see that already in what’s happened, let’s say to the 10-year (bond yields), the steepness of the yield curve, to the equity markets and to the US dollar. US dollar and US Treasury strength will also be part of this calculus. So it’s not just going to be tariffs that’s going to affect emerging markets. It will be US dollar strength, it will be the rise in US Treasuries and tightness in global financial conditions, both of them emerging markets will have to contend with, particularly in Asia.
Q. So what should Indian businesses be prepared for? Lower global growth or are you also putting any downside risk to your India growth estimates?
A. As far as India is concerned, it is not going to be in the line of direct tariffs. It is going to be indirect impact. And the indirect impact comes in two ways. One indirect impact is going to be that the dollar CNY most likely, as was the case in 2018-19, will depreciate in response to whatever tariffs is imposed. Last time, 70% of the tariff increased. So tariffs in China were raised from 3% effective rate to 21% effective rate, and dollar CNY depreciated about 13%. So 70% of the 17 percentage point or about 70% of that was in dollar CNY.
If that’s the playbook, it is a significant depreciation of dollar CNY that is probably in the making. PBOC will clearly not allow that amount of depreciation fearing financial instability. So let’s say we even go halfway through, even that is a significant yuan depreciation, which means that the INR will appreciate by exactly that much against CNY. And the net trade impact of that is going to be significant. So that’s the first part of it.
The second part of it is that China will try to find other markets to where it will sell its products. That’s what happened in 2018-19. And the places where China sold its products using its depreciated currency was Emerging Asia. India was included in that. Latin America, Russia, etc.
I think the combination of these two things is what India will have to contend as the first shock coming from the trade tariffs.
Q. All banks and brokerages are already rewriting their rupee trajectory to depreciation. But let me come to the Fed. What about the Fed’s terminal rate? Will it be higher than you thought originally?
A. The Fed will face the same kinds of uncertainties that we are facing in terms of, we don’t know what the policy specifics are. And we not only know, we don’t know what the policy specifics will be. So our sense is that after this week’s rate cut, which is probably baked in the price, the Fed slows down because that’s the right sort of response in the face of increased uncertainty about what’s going to happen to employment or inflation.
So instead of a cut every meeting, we are thinking now of cuts every quarter, and we have basically raised our terminal rate. We used to have it at 3%, but we are now looking at 3.5%. It’s moved up by about 50 basis points, close to where market is, but there is a slowdown in the pace of the Fed cutting cycle. But my point is, that is not how let’s say Reserve Bank of India is going to react. Yeah, I don’t think Reserve Bank of India waits for what Fed does it is going. To react to market condition, to the dollar, to what has happened to us, treasuries now, and that’s, I think, how all central banks are going to react. Yeah.
Q. So, does the space for rate cuts go down in India as well?
A. The space for rate cuts broadly in Emerging Asia goes down definitely in the fourth quarter of this year. So all the rate cuts that we have in the fourth quarter of this year in several countries that pulled back. The only countries in which we would still imagine or think about rate cuts in 2025 at least, in the first half, are probably Korea and, to some extent, India. And that is based not just on the tariffs, but the growth slowdown that we are seeing in high frequency data.
Given that inflation seems to be coming back to normal levels, and the case for rate cuts in India had already been done sometime back on a fundamental basis but held back because of financial stability reasons, that probably will happen somewhere in the first half of 2025.
Another important point here is if you go back to 2018-19, we focused on trade because it was tariff related. But that wasn’t where the negative impact was. If you look at what happened in 2018-19, specifically in July of 2018 that was when the first set of tariffs were imposed, the biggest reaction was on global business sentiment, including in India. Both PMIs and capital spending globally and in India, plummeted. And it wasn’t till about the third quarter of 2019 that we saw some stabilisation. So the biggest unknown is how business sentiment is affected and how capital spending reacts to it.
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