Trade policy was a major focus of the Trump campaign and is an area where the president has significant discretion. As a result, even if the Trump administration takes a softer line in many areas relative to campaign rhetoric, we expect the administration to follow through on pledges to take a tougher line on trade, with focus on country and sectorspecific trade imbalances. By country, the US’ largest goods trade deficits are with China, followed by the rest of Asia, Mexico and to a lesser extent Western Europe. By sector, the deficits are largest in technology and related products, motor vehicles and apparel. If policymakers are to focus on country-sector combinations, computers from China account for the largest goods trade deficit, making the country a notable target for trade action.
Emerging economies that have benefitted from global trade are likely to see growth headwinds, notably in China and Mexico. China is likely to respond to growth pressure with additional credit growth and fiscal stimulus focused on infrastructure given a strong desire for stability ahead of the Communist Party Congress in the fall of 2017. As a result, China’s imbalances could worsen, which could prompt capital outflows and renewed concerns about the country’s growing debt. In Mexico, where the economy has already shown signs of slowing, trade uncertainty acts as another headwind.
The aggressiveness of US protectionist measures will also be an important indicator of the potential for retaliatory tariffs on US imports. Retaliatory tariffs by China may be less effective because US exports to China are not as great as Chinese exports to the US. Still, tariffs would put upward pressure on the price of imported goods and could contribute to higher inflation, adding to the case for Fed rate hikes in the US.