Donald Trump’s return to the White House promises a bold revival of tariffs, a policy he now considers his signature move.

His proposed measures include a 25% tariff on goods from Mexico and Canada and an additional 10% levy on Chinese imports. 

While Trump argues these moves will protect American jobs and reduce trade deficits, the effects are already rippling across economies. 

From China’s strategic countermeasures to Mexico’s fears of economic slowdown, nations are bracing for both the direct and indirect fallout of Trump’s trade war.

China has a target on its back

China is Trump’s primary target. With tariffs on Chinese imports potentially reaching as high as 35-60%, Beijing faces a direct hit to its export-driven economy. 
Analysts estimate these measures could shave up to 1% off China’s GDP growth, which already slowed to 4.8% in 2024—below Beijing’s 5% target.

However, China is not unprepared. Over the past five years, Beijing has crafted what experts call a “supply chain warfare” strategy.

It has introduced export controls on critical materials like rare earths and lithium, essential for global tech and automotive industries. 

The country also signaled its readiness to weaponize its currency.

Allowing the yuan to weaken strategically could offset the impact of tariffs and maintain the competitiveness of its exports.

Additionally, Beijing is leveraging diplomatic and trade ties with other regions, such as Southeast Asia and the Global South, to diversify its markets and reduce dependence on the US.

On top of that, sanctions on US companies operating in China have disrupted American supply chains. 

Finally, Beijing has also unleashed $2.03 trillion in domestic stimulus to support its economy, though critics argue these measures are insufficient to address structural weaknesses like deflation and weak consumer demand.

Whether these policies can buffer the impact of Trump’s tariffs remains an open question.

Mexico remains vulnerable

Mexico is the United States’ largest trading partner. It now faces an existential threat from Trump’s proposed 25% tariff.

With 80% of its exports heading north, the potential damage is staggering: nearly 11% of Mexico’s GDP could be at risk, according to Bloomberg Economics.
Key industries, particularly agriculture and automotive manufacturing, are bracing for the worst.

Avocado growers, for instance, fear that higher prices could push US consumers to abandon the fruit altogether.

Similarly, Mexican-made car parts—critical to North American supply chains—could see reduced demand as tariffs make them costlier for US manufacturers.

Nevertheless, president Claudia Sheinbaum remains publicly optimistic, emphasizing Mexico’s efforts to curb migration and drug flows.

Through her words, she is justifying Trump’s tariffs.

Behind the scenes, however, her administration is drafting retaliatory tariffs targeting politically sensitive US industries.

Historically, Mexico has focused on products like whiskey and dairy during trade disputes, and this playbook is likely to be revisited.

How much leverage does Canada have?

Canada’s economic integration with the US makes it highly susceptible to Trump’s policies.

Over 75% of Canadian exports are US-bound, including key sectors like energy, lumber, and automotive manufacturing. 

Analysts predict that a 25% tariff could push Canada’s inflation above 7% by mid-2025, while unemployment could climb to 8%.

Prime Minister Justin Trudeau has maintained a diplomatic stance, emphasizing dialogue over retaliation.

However, Canada is also preparing a list of countermeasures should negotiations fail.

The 2018 steel and aluminum tariff dispute serves as a blueprint, where Canada imposed tariffs on US goods like whiskey and yogurt to apply pressure on politically significant regions.

The tariffs’ effects could ripple back into the US as well.

Canadian oil accounts for 20% of US energy supplies, and higher tariffs could raise American gas prices by up to 70 cents per gallon, according to analysts.

Japan could be caught in a crossfire

Japan, the world’s third-largest economy, is not directly targeted by Trump’s tariffs but remains vulnerable to their indirect effects. 

Tariffs on Chinese and Mexican goods could disrupt Japanese supply chains, particularly for companies with production facilities in those countries.

Japanese officials are concerned about potential scrutiny over currency manipulation and trade imbalances, areas where Tokyo is already under US monitoring.

Japan’s trade surplus with the US remains significant, and its weakening yen could draw further criticism from the Trump administration.

Despite these challenges, Japan has some buffers. Its $783 billion in cumulative foreign direct investment in the US makes it the largest foreign employer in American manufacturing, a position that could offer some leverage in negotiations. 

Tokyo is also aligning with US efforts to strengthen supply chain resilience and limit critical technology exports to China.

If Japan plays its cards right, it could emerge as the unexpected winner of Trump’s potential trade war.

An opportunity in disguise for India

India stands apart from other nations as it views Trump’s tariffs as an opportunity rather than a threat. 

While Trump has criticized India for high tariffs, New Delhi is open to negotiating better trade terms for US firms in exchange for improved access for Indian exports.

India’s diversified trade relationships and relatively low dependence on the US market make it less vulnerable to direct impacts.

In 2023, India’s exports to the US totalled $120 billion, making America its largest trading partner. 

Officials are optimistic about reviving stalled trade talks from Trump’s first term, potentially paving the way for a limited trade deal or even a free trade agreement.

What’s at stake?

Trump’s tariffs are not just about economics; they are a political tool.

By tying tariffs to issues like immigration and drug trafficking, Trump is broadening their scope beyond trade. However, the economic consequences of such policies could be profound.

For US consumers, tariffs mean higher prices for everyday goods.

For trading partners like China, Mexico, and Canada, tariffs threaten to destabilize economies heavily reliant on US trade.

The global implications are equally significant.

Tariffs could undermine multilateral institutions like the World Trade Organization and push nations toward more protectionist policies.

This fragmentation risks eroding decades of progress in global economic cooperation.

For countries like Japan and India, the focus will be on balancing cooperation with the US while protecting their own interests.

Nations are likely to adopt a mix of retaliatory measures, strategic concessions, and long-term investment shifts to mitigate the impact of Trump’s trade policies.

Trump’s tariffs are a double-edged sword. While they may serve as a negotiating tool, their economic fallout could ripple across the global economy, affecting consumers, manufacturers, and policymakers alike. Whether these policies achieve their intended goals remains to be seen.

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The yuan tumbled to its weakest level since November 2023, with both onshore and offshore trading seeing declines.

This comes despite China’s central bank, the People’s Bank of China (PBOC), attempting to bolster sentiment by setting a stronger-than-expected daily reference rate on Tuesday.

Traders remain unconvinced, as concerns over slowing economic growth and potential US tariffs under Donald Trump’s administration continue to weigh on the currency.

China’s stimulus measures fail to inspire

China has implemented a series of stimulus measures to revitalize its economy, but investor confidence remains low.

The nation’s residential market slump and weak industrial performance have added to the pessimism.

The yuan’s decline is further exacerbated by a rising US dollar, bolstered by optimism over the American economic outlook.

Christopher Wong, a strategist at Oversea-Chinese Banking Corp., summarised the market sentiment in a Bloomberg report,

The yuan remains sluggish amid expectations for further rate cuts at home while the economic recovery remains uneven. US tariffs can further hurt the currency.

Trade tensions escalate

Pressure on the yuan has intensified due to escalating trade tensions.

The US announced new restrictions on China’s access to key components for chips and artificial intelligence earlier this week.

Adding to the strain, Trump reiterated over the weekend his threat to impose 100% tariffs on China and other countries, reigniting fears of a trade war.

Analysts worry that Trump’s potential policies, expected to take effect in January 2025, could further weaken the yuan.

“The market fears uncertainties around Trump’s potential tariffs, which could hit as soon as January,” said Wee Khoon Chong, a strategist at BNY Mellon, in the report.

Interest-rate differential widens

China’s widening interest-rate gap with the US is also weighing on the yuan.

The yield on China’s 10-year bonds dropped to a record low on Monday, more than two percentage points below its US equivalent.

This differential makes higher-yielding US assets more attractive to investors, further pressuring the yuan.

The onshore yuan traded at its largest discount to the PBOC’s fixing since July, highlighting bearish market sentiment.

Analysts from BNP Paribas SA, UBS AG, and Societe Generale SA predict that the yuan could weaken beyond its record low of 7.3510 against the dollar in 2025.

State intervention slows the slide

As the onshore yuan approached the 7.30 mark against the dollar, Chinese state banks intervened, selling dollars to cap further losses.

The PBOC set the yuan’s daily reference rate at 7.1996, reinforcing its commitment to managing depreciation pressures.

Khoon Goh, head of Asia Research at ANZ Bank, noted the significance of the 7.20 reference level.

“Any fix set higher would trigger more immediate dollar buying,” Goh said.

He also emphasized that the PBOC has several tools at its disposal to stabilize the currency if needed.

The yuan’s struggles rippled through Chinese equity markets.

The CSI 300 Index fell by 0.6% during Tuesday trading, while the Hang Seng China Enterprises Index dropped as much as 1.1% before recovering.

Looking ahead, analysts expect continued volatility in the yuan as traders weigh China’s policy responses against external economic pressures.

With Trump’s administration poised to reimpose tariffs, the outlook for the yuan remains fraught with uncertainty.

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The Nasdaq Composite index rose to a record high on Monday, boosted by gains in Intel, Super Micro Computers and Tesla. 

At the time of writing, the Nasdaq Composite index was nearly 1% higher, while the S&P 500 index rose 0.2%. The Dow Jones Industrial Average was 0.3% lower on Monday. 

Tech stocks jumped on Monday as Tesla and Intel gained sharply. Shares of Super Micro Computers also surged 27% during Monday’s session. 

“Investors will now be considering how much exposure to run in the lead-up to the year-end,” David Morrison, senior market analyst at Trade Nation said. 

The general expectation is for some kind of ‘Santa Rally’ to take equities higher through Christmas and into New Year. But there’s still a fair amount to consider before getting to that point.

Last month, both the Dow Jones and the S&P 500 rose sharply, and marked their best month of 2024. Most of the gains came in the postelection rally after Donald Trump secured a victory in this year’s presidential election. 

On Friday, both indexes notched closing highs in a shortened trading session with low volumes. 

Shares of Super Micro and Intel pop

Shares of Super Micro Computer popped more than 15% after a special committee said it found “no evidence of misconduct”, and that the firm’s financial statements were “materially accurate”. 

The artificial intelligence server company said it has appointed a new chief accounting officer, and is searching for a new chief financial officer. The company’s stock jumped more than 31% on Monday.

Meanwhile, shares of Intel jumped 6% earlier on Monday after the chip maker announced that CEO Pat Gelsinger has retired. 

The company named David Zinsner and Michelle Johnston Holthaus interim co-CEOs.

Tesla gains sharply

Shares of electric vehicle maker gained more than 3% on Monday after Tesla’s vice president of AI software tweeted on Saturday night that version 13 of the company’s “Full Self Driving” driver-assistance software has started rolling out to some customers. 

“TSLA is clearly not just an automaker, as evidenced by its current market cap surpassing the aggregate value of the top 10 global automakers,” Stephen Gengaro, analyst at Stifel was quoted by CNBC. 

“While we have confidence in TSLA’s Auto business, the significant value creation potential from its AI-based full self-driving capabilities and Cybercab (Robotaxi) underpin our positive outlook.”

Focus on Trump tariff and Fed policy

Trump on Sunday threatened to impose “100 tariffs” on the BRICS bloc of countries, which includes China. 

Trump warned against BRICS nations’ attempts to form a new currency and shift away from the US dollar. He threatened to cut off the BRICS nations, which includes Brazil, Russia, India, China and South Africa, from US trade. 

Last week, Trump had also said that the US government will impose steep tariffs on all imported goods from Mexico and Canada. He also threatened to impose another 10% tariff on China, on the already proposed 60%. 

Meanwhile, investors will also focus on the US Federal Reserve’s policy meeting later this month. The market is expecting the US central bank to cut interest rates by 25 basis points this month. 

“Interest rate cuts have been an undoubted tailwind for equities this year, even if the Fed tempered its reductions when compared to expectations back in January. But investors are far less dovish for 2025,” Morrison said. 

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Gold prices were steady on Tuesday as the yellow metal failed to capitalize on the previous session’s gains. 

Gold’s upside has been capped by a rising dollar. A stronger dollar makes the commodity more expensive for overseas buyers. 

The dollar had fallen briefly in the last trading session, but gained again on Tuesday, weighing on investors’ sentiments. 

“A firmer US Dollar (USD), bolstered by expectations for a less dovish Federal Reserve (Fed), is seen as a key factor undermining demand for the commodity,” Haresh Menghani, editor at FXstreet, said in a report. 

The greenback had also risen after US President-elect Donald Trump threatened to impose “100% tariffs” on the BRICS bloc, warning them against pursuing an alternative to the US currency. 

At the time of writing, the February gold contract on COMEX was $2,660.11 per ounce, largely unchanged from the previous close. 

Economic data awaited

“With a new month starting, traders know that it is best not to jump the gun or make any hasty decision as a plethora of economic data is on the horizon, which could have a substantial impact on the near-term volatility of gold,” Kitco.com said in a report. 

This week, crucial labour data from the US will be released. The ADP employment report and the non-farm payroll data will be released later this week, which will provide a crucial insight into the US economy’s current health. 

An unexpectedly strong data could further support the dollar, and weigh on gold’s allure as an effective investment tool. 

Meanwhile, a slew of US Fed officials are scheduled to speak later this week. Among them, Fed Chair Jerome Powell would be the most notable name. 

Powell will speak on Wednesday, just weeks ahead of the US central bank’s policy meeting. 

Less-dovish Fed?

The recent uncertainty about interest rate cuts by the US Fed has weighed on gold prices. 

Last week, minutes from the Fed’s last policy meeting indicated that the officials were divided on the subject of rate cuts. 

“The minutes, which were released last week, provided the market with limited clarity on the Federal Reserve’s upcoming actions with respect to interest rates,” Kitco.com said. 

Increasingly, the precious metals market is reliant on the incoming economic data to assess the policy stance of the Fed. 

Moreover, Trump’s expansionary policies and tariff hikes are expected to accelerate inflation and make things pricier. This would lead to a slowdown in the pace of rate cuts, and the Fed would be forced to keep them at an elevated level for a longer period. 

Higher rates weigh on investors’ demand for gold as it is a non-yielding metal, unlike bonds. 

According to the CME FedWatch tool, traders have priced in a 75.4% probability of the Fed cutting interest rates by 25 basis points at its December meeting. 

Outlook for gold prices

According to Kitco.com, despite the recent volatility in prices, the medium-to-long-term outlook for gold remains “compelling”. 

Robust demand from global central banks supports gold prices, while protectionist policies, trade disputes, and geopolitical tensions also increase the safe-haven appeal of the yellow metal. 

“The sell-off in both gold (and silver) looks like another knee-jerk reaction to the jump in the US dollar…this is more to do with euro weakness than anything else as investors react to the deteriorating political situation in France,” Morrison said. 

Morrison added:

Technically, gold has lost some of its upside momentum and so bulls should be prepared in case there’s a deeper pullback. But it remains in a bull market, for now. And while calls for a gold price of $5,000 or even $10,000 look far-fetched, there’s still room for fresh all-time highs.

Meanwhile, analysts at Kitco.com see a short surge in gold to above $2,700 per ounce if the Fed cuts rates by 25 bps. 

Also, the market is likely to see some volatility in the upcoming weeks, especially with the uncertainty over the economic state of the US and Trump’s policies. 

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