CITIC Securities Co., Ltd.: Re-discussing the exchange conditions and policy window of Trump's tariffs

Abstract

Recently, the market has paid considerable attention to the exchange conditions and policy window regarding Trump's tariffs. First, what conditions does Trump hope to exchange for the tariffs on China? We believe that Trump may focus more on industrial policy and so-called "structural reforms" in the economic field, while in non-economic areas, he may focus more on global geopolitical hotspots and cooperation on drug control, which differs from the bulk purchases during his previous term. Second, will there be new policy expectations due to Trump's tariff threats before next year's domestic "Two Sessions"? We believe that even if Trump fulfills his tariff threats based on the IEEPA and signs an executive order at the beginning of his term, the earliest time for tariffs to actually be imposed may be around March to April next year. The national "Two Sessions" next year is more likely to continue the tone of this Central Economic Work Conference and emphasize implementation. Of course, Trump's new verbal tariff threats have a high degree of randomness, and if tariff expectations are further intensified, further expectations for domestic policy efforts are also worth looking forward to.

Main Text

Recently, the market has focused on Trump's tariff exchange conditions and policy window. We analyze two important questions of market concern: 1) If Trump views tariffs as bargaining chips to achieve goals in various fields, what conditions does he hope to exchange for the tariffs on China? 2) With the end of the policy game surrounding the Central Economic Work Conference, will there be drastic changes in Trump's tariffs during the significant policy window from now until next year's "Two Sessions," leading to new domestic policy efforts?

Question 1: What conditions does Trump hope to exchange for the tariffs on China? We believe that Trump may focus more on so-called industrial policy and "structural reforms" in the economic field, while in non-economic areas, he may focus more on global geopolitical hotspots and cooperation on drug control, which differs from the bulk purchases during his previous term.

1. From Trump's cabinet selection approach, tariffs may be seen as bargaining chips to achieve goals in various fields, serving as a tool to revitalize American manufacturing rather than an end in itself. The nominated U.S. Secretary of Commerce, Raimondo, supports this idea. Unlike previous U.S. Secretaries of Commerce, Raimondo will have broader authority over the tariff and trade agenda and will be "directly responsible" to the U.S. Trade Representative (USTR).

2. In the economic field, Trump reached the first phase of the China-U.S. trade agreement during his previous term and attempted to continue advancing the second phase of the trade agreement. However, we believe that there may be some adjustments in his thinking for the new term. The "economic balance" between China and the U.S. was an important goal of the previous trade agreement, but it is necessary to further distinguish between two forms of balance. The balance of trade surplus is a superficial "economic balance." Through bulk purchases or market opening, the economic interdependence between China and the U.S. will further increase, which is not entirely compatible with the mainstream thinking of "de-risking" from China in recent years. Therefore, Trump's new term may focus more on deeper "economic balance," such as industrial policy and so-called "structural reforms," which may become the exchange conditions for Trump's new round of tariffs on China. Objectively speaking, the coordination difficulty of the above topics may be greater than during Trump's previous term

3. In non-economic areas, Trump may also attempt to promote exchanges of localized issues, such as the so-called cross-border flow of fentanyl or coordination on global hotspots like the Russia-Ukraine conflict.

4. In terms of timing, on November 25, 2024, Trump issued his first clear tariff threat after winning the election, which does not mean this will be the full picture of Trump's trade policy; there may still be other tariff threats under different pretenses in the future.

Question 2: Will there be new policy expectations due to Trump's tariff threats before next year's national "Two Sessions"? We believe that even if Trump fulfills his tariff threats based on the IEEPA and signs executive orders in the early days of his presidency, the actual implementation of tariffs may not begin until March-April next year. The national "Two Sessions" next year is more likely to continue the tone of this Central Economic Work Conference and emphasize implementation. Of course, Trump's new verbal tariff threats have a high degree of randomness; if tariff expectations are further intensified, further domestic policy efforts are also worth anticipating.

1. The Central Economic Work Conference will be held on December 11-12, 2024, and the recent capital market's speculation around policies has come to a pause. Overall, the policy level fully recognizes the severe situation where external and internal pressures may significantly increase next year, proposing a series of requirements such as stabilizing growth, stabilizing prices, stabilizing employment, and stabilizing people's livelihoods. We expect the deficit rate to rise to 4% next year, with new special bonds increasing by about 600 billion yuan compared to this year, and special government bonds increasing by 500 to 1,000 billion yuan compared to this year, indicating a significant expansion of general finance; the direction and thinking of consumption policy changes are clear, and the scale, scope, and methods of future stimulus may gradually expand.

2. According to usual work practices, the national "Two Sessions" in March 2025 is expected to continue the policy tone of this Central Economic Work Conference, refining measures and promoting implementation. For example, Han Wenxiu, deputy director of the Central Financial and Economic Commission Office, stated at the "2024-2025 China Economic Annual Conference" on December 14, 2024, that "there is a high gold content behind these new policies and new proposals, and specific plans will be presented at next year's national 'Two Sessions'." Therefore, if new policy intensification expectations arise before next year's national "Two Sessions," it may require certain external factors to trigger, and Trump's tariff threats could be a potential factor.

3. From the perspective of the actual implementation time of tariffs, we believe that the probability of them being implemented before next year's national "Two Sessions" is relatively limited. Among Trump's various tariff tools, the International Emergency Economic Powers Act (IEEPA) is theoretically the fastest option; historically, this tool has never been substantively used to impose tariffs. On May 30, 2019, Trump issued a tariff threat based on IEEPA due to Mexico's inadequate measures to address illegal immigration, but Mexico responded quickly and reached an agreement with the U.S., so there is no historical sample to observe how tariffs based on IEEPA would operate in practice. However, we believe that tariff implementation is an extremely complex process, especially for a vast tariff area like mainland China; imposing tariffs on all goods across the entire tariff area is not a good choice and may still require handling a large number of positive lists or exemption applications Therefore, after Trump is sworn in, the cabinet is approved by Congress, and the White House executive team is fully in place, coupled with possible bilateral negotiations, even if Trump signs relevant executive orders in the early days of his presidency, the earliest possible time for tariffs to actually be imposed may be in March-April next year.

4. Overall, it is likely that the first batch of tariffs from Trump before the national "Two Sessions" next year may not be substantively implemented. The national "Two Sessions" next year is more likely to continue the tone of this Central Economic Work Conference and emphasize implementation. Of course, Trump's new verbal threats regarding tariffs have a high degree of randomness and no specific time limit, and tariff expectations may be further intensified at any time based on the current situation. Further domestic policy efforts to hedge expectations are also worth looking forward to.

Author of this article: Yang Fan S1010515100001, Yao Yuan, Wei Si'an, Source: CITIC Securities Research, Original Title: "Overseas Policy | Re-discussing the Exchange Conditions and Policy Window of Trump's Tariffs"

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