President-elect Donald Trump has vowed additional tariffs on China as well as US neighbors Canada and Mexico. Former general counsel at the Office of the United States Trade Representative Jennifer Hillman says Trump announcing the plan before he's in the office suggests he's looking for Canada or Mexico to offer things to negotiate. She joined Eli Lee Chief Investment Strategist at Bank of Singapore for a conversation on Bloomberg Insights with Haslinda Amin.
Let's get perspective on Trump's tariff pledges with Jennifer Hillman, co director of the CENTO and Inclusive Trade and Development. She previously served on the Wall Trade Organization's a pallet body and also at the US International Trade Commission. Jennifer Joints is from Washington and with us Here in the studio is Eli Lee, chief investment strategists at Bank of Singapore. Jennifer, let's start with you. I mean this is kind of like reminiscent of the renegotiation of NAFTA as just the start of it.
Yeah, it's hugely significant. I mean when you think about it, a twenty five percent tariff on our two largest trading partners. I mean Mexico has now become the number one trading partner with the United States, followed by Canada. And part of it is the markets are highly highly integrated, particularly I would say the two sectors that have sort of already been touched on autos and energy. I mean, autos is one of those industries where you're seeing some of the auto parts literally crossing the border eight times before they ultimately get developed into a car. So when you start to then put a tariff of twenty five percent on each one of those parts each time it crosses the border, until it ends up becoming developed into a car. You start to see how incredibly significant this idea of a twenty five percent tariff on trade with Mexico and Canada. I mean again, you think about it that right now, the trade between the three countries is now in the order of two trillion dollars a year, three million dollars per minute, you know, accounting for ten million jobs and at least fifteen percent of global trade. So this idea of hitting our two largest trading partners, again with this somewhat unusual notion of using tariffs a trade tool, you know, again, an economic trade tool, in order to fight something that is not particularly trade related in the sense that you know, complaining about fentanyl or about you know, border crossings, migration issues. But yet using this tariff tool to do it is again and a very out of the box and again from again many people's perspective, not an appropriate use of a terror and certainly not consistently just the commitments that we made.
Is there a sense that it is the initial selvo? I mean, this is a businessman, he's a negotiator, it's a case of putting the numbers out there so that perhaps you know, his treading potn is we'll come to the table and give a good deal.
Oh absolutely, yes. I think again you can expect this to be very, very transactional. And I think that's part of the reason for announcing it well before he's even in office. I mean, he is clearly looking for and I would say, you know, Canada and Mexico to come to him with offers of things that they can do. And I think you already heard a little bit of the flavor of what Canada is going to say, which is, why are you coming after me Canada with respect to fentanyl and with respect to migration issues that's really not been the issue that the United States has seen is you know, again a flood across the border, coming across the Canadian border. The issue is whether this is partly trying to divide Canada from Mexico and have them be treated differently. But there's no question that this is an opening salvo of a negotiation to try to get again and the problem is a little bit of an unclear result. So again the bargaining will begin about what do either of these countries have to show in order to demonstrate that they've come forward with something that would be acceptable in order to get these tariffs lifted.
Eli lads bring you into the conversation. I mean, as Jennifer indicated, these are huge numbers. These are you know, direct trading partners. Does just change the calculation for you when you take a look at your investment strategy.
Now, yes, absolutely so. Look, President Trump is going right for the jugglar here. These are the three largest trading partners of the US, and I think we have to be really careful on how this is probably going to reset infflicient expectations. I think the general consensus for Trump's two poisieros so far is that it's good for equities, is bad for bonds. And we've seen you know, bond yews on the long endcome up as well. Now there's a limit to how much bond use could come up without scattering the equity rarely. Now, we think that if inflation expectition starts creeping up the fat stops cutting rates, that we could see the ten yure move towards five percent, and history shows us that if it goes beyond that, then that starts to be a problem for the equity up trend that we're seeing. So this is something that we have to be real careful of Slender.
Of course, this is ahead of PC, it's also ahead of that December move. Expectations are that the Fed may cut twenty five basis points. Might this just change the needle for the fat.
Well, we think that the Fed is probably mostly an autopilot for the next to the tree cuts for now. I mean they've just started. Real rates are still too high and Trump hasn't come on yet, so I think they'll do a little bit of We don't see on how the data comes in, but I think, you know, from the last minutes we've saw, I think suddenly grove is still resilient. They are watching out for how you know, inflation expectations are moving, and again if Trump's terriffs moves that needle in the in the direction that they're not looking for, I think we could see a probably higher bond. You start to be a problem for markets.
What we're seeing right now is the reaction in the dollar at the highest level in about two years. I mean, how concerning is that.
That is a problem. That is a problem, That is a problem for emerging markets, and there's a problem for Trump to he wants a week a dollar. We've heard that, which is why I think, you know, the nomination of Scott Besant as Treasury Secretary is a really I think key development yesterday. In fact, I think we saw the dollar weekend on the news of his nomination. We saw bond us come down as well. And I think, you know, he has expertise of how markets work, and I think he's going to be really instrumental in helping Trump get his cake and eat it too, meaning have the tariffs, but yet have markets performed well?
Jennifer, We heard from Eli saying that Trump understands how the markets work. Does Trump understand how terranfs work? Because by imposing tariffs on trading partners it may come back to bite him in well, you know where.
I would say many people would argue that he does not, because certainly he kept saying again and again on the campaign trail that it was China that was paying the tariffs or Mexico that was paying the tariffs, when obviously the reality it is the American importer that is paying the tariffs. So again, the basic cost of all of these tariffs falls on the American importer. And again just to be clear on the impact on inflation and everything else with respect to these Mexican and Canadian tariffs. The importers are bringing these in because these are inputs into what we need. Again, they're largely bringing in parts and components and oil and gas, and so when our importers now have to pay a lot more for all of those components, it makes everything that they make using those imports much more expensive. Then if you flip over to what's going to happen with respect to China again, they're going to add an additional ten percent tariff on top of already all of the existing tariffs. I mean, to me, what's really significant there is what does not right now have an additional tariff coming in from China. It's largely a lot of the kind of retail ready products that are sold at Walmart and Target and all those places. It's electronics, it's you know, it's computers, it's it's it's watches, its appliances, it's clothes, its shoes. Those have largely been spared from these extra China tariffs, but now they are going to get hit by this additional ten percent tariff, and again a lot of that I think you're going to see immediately get passed on in terms of increases to consumers for the prices that they're paying for things.
And by some calculation, US imports would drop fifty percent, exports slumping sixty percent. I mean Trump won the election on the basis of an economy that is, you know, squeezing most of the Americans. I mean, how do you see this playing out in the US economy? How might that pagged growth going forward?
So I think it's going to have a very negative impact on growth because again, a lot of what's being imported are parts and components that you can't just change at the last minute and say, okay, well never mind, I don't want it from China, I'll buy it from somewhere else, or I don't need this part from Mexico, because those component parts have been again engineered and designed and tested and qualified to go into that particular use by that particular American company that is using it to make something else, and they cannot simply immediately turn on a dime and start using product coming in from somewhere else. So it will have a downward pressure on again US production it will have an upward pressure on prices and overall again a downward pressure on economic growth and activity. I mean, we saw this when the Trump tariffs went on, initially ten percent on aluminum, twenty five percent on steel, and then ultimately the tariffs on about three hundred and sixty billion dollars worth of imports. From lots and lots of economic studies to look at what was the impact of the tariffs and the goal stated goal was to return manufacturing and return jobs to the United States. And if you looked at it and said, did it do that, the ultimate answer to that question so far has been no, because those tariffs hurt so many of the downstream users of steel and aluminum that there were job losses. There. There was retaliation again heavily by China, affecting lots for example, of agriculture exports. So again lots of people that had been exporting lost their jobs. So the net net effect of the tariffs to date has been a negative one for the US economy. And so I would imagine that with now these idea of increasing the tariffs, particularly on Canada and Mexico are the two largest trading partners, the effect is going to be even more of a negative downward pressure on US economic growth.
And for China, Eli, the if I were also be negative. This is in the to me, that's just experiencing nascent growth. Yet when it comes to the markets, you say that you are pretty constructive of China, that you should be overweight.
Right, So that is largely a function of evaluations, right, I mean, so much negative news have been priced in. Really the worst sixty percent terrists has been telegraphed in advance. And I do think that the Chinese authorities are much better prepared this time to deal with what's coming. I think, you know what's.
In the toolbox. How can they counter this?
That's interesting because they've done quite a fair but in terms of the monetory side, they've tried to, you know, do a lot of restructuring in terms of local government financing as well. Now, the last error to come will be physical, right, And you know, China has been running on the dual track economy over the last decade. One is focused on exports that's going to be in real trouble with Trumps terrorists to come. But the internal economy, the domestic side, now that's struggling right now, and we think that they are really probably holding in reserve fiscal policies to boost domestic consumption, and with Trump's terrorists being annow, that's probably in reserve to counteract them when it comes.
So you're looking at a triple arcot soon.
Sure, yeah, I think. You know, on the monetary side, the easing is going to continue. That's going to be probably more to come in terms of clearing the you know, unsold inventory. On the housing side as well, what's really been lacking and inadequate and frankly disappointing so far is the lack of fiscal especially in terms of you know, boosting consumption demand in terms of I think what we're seeing in terms of business confidence as well, and that I think will come probably in the first half of next year in response to Trump's terrorists.
Internally, if you're over with China, what would you be buying right now when we see a dip in Chinese stocks, what would you be buying right.
The strategy here is we think the Asias are probably more domestically focused. It will be more sheltered against the terrists. We talked about the domestic track earlier. The large platform Internet names are excellent companies. Those are really attractively value right now. And I think the US prong of our approach is really the quality you please that are stable, growing companies that give cash flow, so we think they are still on a bottom up basis, a lot of attractive opportunities.
In China, Jennifer, before we let you go, what are the prospects of a trade war, an extended trade war?
Yeah, exactly. So just to understand it, I mean, obviously, all of these tariffs break the US's commitments. I mean, under the US MCA agreement with Canada and Mexico, we committed to charge zero tariffs on goods that meet these rules of origin qualifying as these goods. Similarly, we agreed within the WTO system not to charge China any more tariffs than those that were listed in our tariff schedule. So all of this violates the United States's commitments to its trading partners, which means that Canada and Mexico and China are well within their rights at some level to challenge these US actions and presumably ultimately to retaliate. That is, their sort of legal right to bring these challenges and to think about that and the issue there is whether that's advisable, because once you start down this tit for tat road, you know, again, then it leads again to a much much broader trade war, which has much more negative impacts for the entire world. I mean, certainly, if we see the world breaking up into blocks, it will have a hugely negative effect on the world.