Video: China, the US and the implications of Donald Trump’s return to the White House
Our experts consider some of the possible economic and geopolitical scenarios following a change in US administration.
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There remains much uncertainty over what Donald Trump’s second term as US President might mean for the world’s two largest economies. Senior Emerging Markets Economist David Rees and former UK ambassador to China Sir Sebastian Wood, who is the Chair of China Affairs at Schroders, sit down with Stuart Podmore, Investment Propositions Director. Together they examine the possible implications of Trump’s second stint in office. Click here to watch the video and see below six of their key observations.
1. China wants to remain open and opposes protectionist policies
Sebastian Wood: I was recently part of a small group of foreign business representatives who were invited to a roundtable meeting with the Chinese premier Li Qiang. And the clear subtext of the meeting was that China wants to remain open, wants to continue its high-level opening-up process and opposes protectionism and opposes the fragmentation of supply chains.
2. Risk of adverse economic and geopolitical outcomes
David Rees: Our base case is that things turn out to be fairly transactional, meaning that some kind of agreement is made with the Trump administration and that could lift the Chinese economy in the second half of next year. But you need clarity because the risks of more adverse outcomes are huge. So, until we really understand how things are going to pan out, you've got to be cautious on the outlook for China.
See: Economic and Strategy Viewpoint – Q4 2024
Sebastian Wood: Trump is likely to be more transactional and less ideological in his approach to international affairs than a Democrat administration would have been. But the people he's appointed to state and national security have an orthodox view. I’d expect them to focus US military resources on the West Pacific, take some resource away from Europe if necessary to do that, build up a strong deterrence capability, achieve peace with China through strength. We do need to pay attention though to President Trump's policy towards Taiwan. If there’s a sudden shift, either towards support for Taiwan or away from support for Taiwan, that could disrupt the balance of deterrence across the Taiwan Straits and destabilise the situation.
3. Pro-business views dominant among economic advisers
Sebastian Wood: I think on the economic front there are two schools of thought among Trump's economic advisers. You have people who believe in business, basically representatives of the business community. And then you have people who believe in economic decoupling, take a more ideological approach. And if you look at the appointments that he's made so far, it appears that the business group is going to be the dominant one. And these are people who understand the President's desire to use tariffs but have made clear they see this as a negotiating tactic.
4. Potential for the economy to recover from mid 2025
David Rees: There will be a lot of noise around tariffs to extract concessions out of China, and extract concessions out of pretty much every country that the US trades with. We've had the view for a while that next year exports would be weakening anyway. Then you throw in uncertainty about trade relations and the knock-on impact on investment for an economy where the domestic side is already quite weak, and that means we do see growth slowing. But ultimately, if we're right and Trump is quite transactional, and we get the release of the concerns about trade and investment, then we can start to see positive follow-through for the Chinese economy from the middle of 2025 onwards.
See: Six reasons for a strategic active approach to investing in China
5. External environment less supportive for China than during first trade war
Sebastian Wood: If there is a big Trump tariff shock China is less protected this time. The impact of Trump’s tariffs on the Chinese economy last time was mitigated by the big Covid-related stimulus packages in Europe and the United States which boosted demand for Chinese exports. Additionally, due to sanctions the Russians turned to China creating a big surge in exports. As a result you might have more of a salutary shock to the Chinese system and that might prompt the Chinese authorities to look at structural reforms to boost domestic demand.
6. Worst-case scenario may prompt significant fiscal stimulus
David Rees: If Trump came with a 60% tariff on Chinese imports and it was effective, in the near-term China's economy would have a big shock because it would get hit both on the trade angle and the investment confidence angle. You would get a recession in manufacturing and capital expenditure that would eventually then force the Chinese authorities to come in with a big stimulus. And if they wanted to maintain a decent level of trend growth over the medium to long term, that would have to be followed by structural reform to boost the domestic economy and essentially consumption to rebalance the economy away from investment.
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