Trump's Allure To The Forex Market - Trade Policy Under Trump's Regime

Vishal Pathak, Content Writer | Thursday, 18 July 2024, 14:14 IST

  • No Image

Trumps Allure To The Forex Market - Trade Policy Under Trumps RegimeUnder President Donald Trump, the United States experienced a dramatic shift in trade policy, reflecting a strong departure from the previous administration's app- roach. Emphasizing "America First," Tru- mp aimed to protect American industries and jobs through a series of protectionist measures, renegotiations of existing trade agreements, and the imposition of tariffs. His administration's actions led to signi- ficant changes in the global trade land- scape, impacting relationships with both allies and adversaries. Here’s a detailed look at the key aspects and outcomes of Trump’s trade policy.

Under President Donald Trump, the United States experienced a dramatic shift in trade policy, reflecting a strong departure from the previous administration's approach. Emphasizing "America First," Trump aimed to protect American industries and jobs through a series of protectionist measures, renegotiations of existing trade agreements, and the imposition of tariffs. His administration's actions led to significant changes in the global trade landscape, impacting relationships with both allies and adversaries. Here’s a detailed look at the key aspects and outcomes of Trump’s trade policy.

Key elements of Trump's trade policy

1. Tariffs and Trade Wars

  • China: The most prominent aspect of Trump's trade policy was the trade war with China. Starting in 2018, the US imposed tariffs on hundreds of billions of dollars' worth of Chinese goods, citing unfair trade practices and intellectual property theft. China retaliated with tariffs on US goods.
  • Steel and Aluminum: In 2018, Trump imposed tariffs on steel (25%) and aluminum (10%) imports, citing national security concerns. This affected imports from many countries, including key allies.

2. Renegotiation of Trade Agreements

  • NAFTA to USMCA: Trump fulfilled his campaign promise to renegotiate the North American Free Trade Agreement (NAFTA). The new agreement, called the United States-Mexico-Canada Agreement (USMCA), included provisions aimed at boosting auto manufacturing in the US and increasing labor rights in Mexico.
  • KORUS: The US-Korea Free Trade Agreement (KORUS) was renegotiated to give US automakers greater access to the South Korean market and extend tariffs on Korean trucks.

3. Withdrawal from Multilateral Agreements

  • TPP: One of Trump’s first actions was to withdraw the US from the Trans-Pacific Partnership (TPP), a multilateral trade agreement involving 12 Pacific Rim countries, which was aimed at countering China's influence in the region.

4. Emphasis on Bilateral Trade Deals

  • Trump preferred bilateral trade agreements over multilateral ones, believing they allowed for better terms for the US. This approach led to negotiations for individual deals, such as the US-Japan Trade Agreement.

5. America First Policy

  • Protectionism: Trump's trade policy was driven by the "America First" philosophy, aiming to protect American industries and jobs from foreign competition. This included incentivizing companies to relocate manufacturing to the US and penalizing those who outsourced jobs.
  • Reducing Trade Deficits: Trump consistently emphasized reducing the US trade deficit, particularly with China, arguing that existing trade imbalances were harmful to the US economy.

6. Impact on Global Trade Relations

  • Tensions with Allies: Tariffs and aggressive trade negotiations strained relations with traditional allies, including the European Union, Canada, and Mexico.
  • Global Supply Chains: The trade war with China and tariffs on other countries led to disruptions in global supply chains, prompting companies to rethink their sourcing and manufacturing strategies.

The Pressure on China’s yuan

Analysts at a seminar organized by Renmin University of China, indicated that uncertainty surrounding the potential victory of Donald Trump in the upcoming November US presidential election, along with ongoing geopolitical tensions, could increase volatility in the foreign exchange market and exert additional pressure on China’s yuan in the coming months.

“One significant uncertainty in the second half of this year is the US presidential election,” remarked Xu Qiyuan, a senior research fellow at the Chinese Academy of Social Sciences, when discussing the recent strength of the US dollar.

“If Trump wins, markets might anticipate a boost to the US economy,” Xu said, adding that this could also increase the risk of US inflation. Such a scenario could delay interest rate cuts by the US Federal Reserve, thereby maintaining the significant interest rate differential between China and the US.

Trade Policy Under Trump

During Trump's presidency, the financial markets experienced significant volatility, impacting various trading instruments, including Contracts for Difference (CFDs). Trump's policies, such as tax cuts, tariffs on Chinese goods, and regulatory changes, often led to unpredictable market movements. For Forex traders, this volatility presented both opportunities and risks. Rapid shifts in market sentiment due to Trump's announcements or tweets could lead to quick gains or losses, depending on traders' positions and strategies.

The uncertainty and rapid changes in market conditions required CFD traders to be particularly vigilant, leveraging tools like stop-loss orders and maintaining a keen awareness of geopolitical and economic developments during Trump's tenure. Also, the fluctuating market conditions meant that traders needed to stay informed and adaptable, frequently reassessing their trading plans to navigate the unpredictable landscape effectively. This period highlighted the importance of risk management and strategic planning in forex trading.

China’s yuan, along with other Asian currencies, has experienced renewed depreciation pressure in recent weeks, primarily due to the strength of the US dollar. Last month, the People’s Bank of China repeatedly permitted the daily yuan central parity rate to decline gradually at a marginal pace, leading to speculation that the central bank might be intentionally weakening the currency.

PBOC’s Measures to Control Yuan Fluctuations Amid Depreciation Concerns

The People’s Bank of China (PBOC) limits the daily fluctuation range of the yuan exchange rate in the onshore spot market to 2 percent above or below the parity rate.

China has maintained stringent control over cross-border fund flows, worried that a weak yuan could trigger capital outflows. While there are expectations that the PBOC might ease interest rates to stimulate weak credit demand, a rate cut could also increase depreciation pressure on the yuan.

Guan Tao, chief economist at Bank of China International and a former foreign exchange official, stated that an excessive focus on stabilizing the yuan’s exchange rate could constrain China’s monetary policy flexibility.

“Monetary independence can only be achieved if you allow for foreign exchange volatility,” Guan said.

Final Words

Uncertainty around Donald Trump’s potential re-election and geopolitical tensions could increase volatility in the foreign exchange market, pressuring China’s yuan. The recent depreciation of the yuan is driven by a strong US dollar, with the PBOC allowing gradual declines in the parity rate.

The PBOC restricts daily yuan fluctuations to 2% and controls cross-border fund flows to prevent capital outflows. Expectations of interest rate cuts to boost credit demand could further weaken the yuan. Guan Tao of Bank of China International stressed that monetary independence requires accepting foreign exchange volatility.

🍪 Do you like cookies?

We use cookies to ensure you get the best experience on our website. Read more...