Shifting currency dynamics: A potential move from petrodollars to petroyuan?

Shifting currency dynamics: A potential move from petrodollars to petroyuan?

In the anticipated second term of President Donald Trump, starting in January 2025, the global economy may face significant disruptions. According to financial experts, potential economic shocks and implications for the global economy include intensified tariff policies, increased trade tensions, and heightened policy uncertainty, especially affecting emerging markets, China, and US-China relations.

Tariffs and Trade Tensions

One of the key concerns is the imposition of tariffs. Trump, using the International Emergency Economic Powers Act, has implemented significant tariffs, such as a 20-25% tariff on Chinese goods and tariffs on Canada and Mexico related to "fentanyl trafficking." These tariffs, often described as "reciprocal," target countries with trade barriers against the US, leading to confusion and diplomatic strains. The tariff strategy lacks clarity, with mixed signals on whether tariffs will be lifted after negotiations or used as permanent protective measures.

Impact on the US Economy

The International Monetary Fund (IMF) forecasts a slowdown in US GDP growth to 1.8% in 2025, down 0.9 percentage points from earlier projections, reflecting the negative economic impacts of tariffs and policy uncertainty. The possibility of a US economic recession cannot be ruled out, partly due to trade-related uncertainty dampening demand.

Global Economic Effects

The IMF has lowered the global growth outlook to 2.8% for 2025, down 0.5 percentage points, largely due to trade tensions harming trade flows and investment globally. J.P. Morgan estimates that Trump's tariff regime could reduce global GDP by roughly 1%. Business sentiment is declining sharply, increasing the risk of recessionary pressures worldwide.

Implications for China

The US-China economic struggle remains intense, with both economies suffering "double loss." China's growth is also adversely affected by tariffs and disrupted trade relations. Attempts to redefine China's status as a developing country in the global trade system have not yet yielded clear policy results.

Emerging Markets

Emerging markets face heightened risks from reduced global growth, trade disruptions, and geopolitical instability. The ripple effects of US tariffs and deteriorated US-China relations impose external shocks on these economies, complicating their growth outlooks and financial stability.

US-China Relations

The second term witnesses an escalation in economic and strategic rivalry. Trump's aggressive trade policies and tariff use deepen tensions and uncertainty. While some trade talks occur, a coherent or stable framework for resolving fundamental issues is lacking, risking long-term fractures in bilateral economic relations.

Domestic Economic Claims

Despite these external shocks, the Trump administration highlights achievements like historic tax cuts for the working and middle class, booming stock markets, and moderated inflation domestically. They also claim success in "unprecedented trade deals" and border control measures, though these coexist with outward trade conflicts and uncertainty.

The second Trump term is characterized by increased economic shocks through tariffs and trade conflicts, leading to slower growth, global economic drag, and stress on emerging markets and China. The US-China relationship remains confrontational, with no clear resolution mechanisms, thus posing medium-term risks to global economic stability.

However, the second term also brings an opportunity for economic rethinking, as Geoffrey Yu, senior EMEA markets strategist at BNY, writes. A roundtable discussion will focus on US-China relations under Trump's new administration, policy responses, currency trends, and the macroeconomic impact of tariffs for both economies.

Beijing is prepared to retaliate against US trade policies, according to Zongyuan Zoe Liu, Maurice R. Greenberg senior fellow for China studies at the Council on Foreign Relations. Mark Sobel, US chair of OMFIF, warns that Trump's trade policies could cause a shock to the global economy. Sobel will speak with Max Castelli, head of strategy, sovereign institutions, UBS Asset Management, about the role of the dollar and various dedollarisation scenarios. They will discuss Saudi Arabia's decision to join Project mBridge and its potential implications for the incumbent dollar-based financial system.

The global economy is expected to underperform due to significant uncertainty caused by Trump's trade policies. Elliot Hentov, head of macro policy research at State Street Global Advisors, writes that the impact of Trump's policies on the US economy is a key concern. Argentina is seeking a US-backed IMF lifeline, and Trump's policies may have a substantial impact on China's standing.

Jared Franz, economist at Capital Group, explains that the resilience of global growth is dependent on a resilient US economy. Joachim Nagel, president of the Deutsche Bundesbank, will deliver a lecture on the natural rate of interest, its measurement, evolution, uncertainty, and implications for policy-making in the coming years. Udaibir Das, visiting professor at the National Council of Applied Economic Research, suggests that Trump's second term will be a moment of reckoning for Brics countries and emerging markets. Trump's second term could have five significant implications for Brics countries and emerging markets.

In conclusion, the economic landscape under Trump's second term presents both challenges and opportunities. Navigating this complex environment will require careful consideration and strategic decision-making from global investors and policymakers alike.

1. The imposition of tariffs, particularly the 20-25% tariff on Chinese goods and tariffs on Canada and Mexico, is a key concern for public discussions, especially after Trump's use of the International Emergency Economic Powers Act.
2. Researchers from various fields, including finance, business, and politics, are actively engaged in meetings and studies to understand and respond to the implications of these tariffs for the US economy and global governance.
3. In the emerging markets, policy responses are being researched and developed to cope with the external shocks caused by US tariffs and deteriorated US-China relations, focusing on stabilizing their growth outlooks and financial stability.
4. As the second term unfolds, there is a growing need for a comprehensive policy to address the trade conflict and its impacts on sovereign investments, as suggested by Mark Sobel, US chair of OMFIF.
5. In the midst of economic chaos, there are prospects for financial research and innovation, as evidenced by Project mBridge, which Saudi Arabia is joining, aiming to challenge the incumbent dollar-based financial system.
6. The ongoing tension between the US and China significantly affects economic governance on a general-news level, leading to uncertainty in global capital markets and necessitating strategic decision-making from investors and policymakers.
7. As the global economy faces significant shocks, data-driven research will play a crucial role in understanding and mitigating the effects of these disruptions, especially as they relate to policy, trade, and emerging markets.

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