By William Pesek
About the author: William Pesek is a longtime Asia opinion writer, based in Tokyo. He is a former columnist for Barron's and Bloomberg and is the author of Japanization: What the World Can Learn from Japan's Lost Decades.
Asia had the first crack Monday at letting President Donald Trump know how disastrous his trade war will be for the global economy. The region's markets didn't hold back.
Japan's Nikkei 225 Stock Average lost over 1,000 points. Shares across Asia-Pacific economies plunged the most in six months after Trump slapped 25% tariffs on Canada and Mexico and 10% taxes on China effective Tuesday.
Though Beijing got off easier than feared -- for now -- Asia punters can see how Trump is aiming a wrecking ball at his own economy with the most drastic action of protectionism by a White House in nearly a century. The fallout would slam Asia's export-dependent economies.
Tariffs are sure to intensify inflation, disrupt supply chains, and leave the Federal Reserve more likely to tighten than ease. That has the dollar skyrocketing. It's the last thing Asia needs. Already, the muscular dollar is hoovering up global capital governments from Tokyo to Jakarta need to support currencies and finance budget deficits.
On Monday, though, eyes across Asia were on the Chinese yuan.
Weeks before Trump acted to make the 1930s -- the last time the U.S. pulled this kind of global stunt -- great again, the yuan was under extreme downward pressure. People's Bank of China officials have spent the first five weeks of 2025 clashing with speculators convinced Beijing might devalue.
This calculus goes way beyond the Trump 2.0 White House. Back in early November, when Asia was pretty sure Kamala Harris would be the 47th president, economists reckoned deflation left Beijing with little choice but to weaken the exchange rate.
China's longest deflationary streak since the 1997 Asian crisis bears President Xi Jinping's fingerprints. Had Xi's Communist Party acted urgently to end a titanically large property crisis and support weak household demand, fewer economists might be buzzing about a Japan-like lost decade.
Had Team Xi moved faster to stabilize local-government finances, second-and-third tier cities might have a better shot at being the next Shenzhen or Hangzhou. Jack Ma helped put this latter metropolis on the global map by creating Alibaba Group there. Now, Ma and his fellow tech founder are in political limbo as Team Xi decides if it likes internet platforms or not.
Yet China is where it is as Trump's "Tariff Man" alter-ego leaps off the page into a financial market near you. An animating question now is whether Xi decides Trump's trade war gives him political cover to devalue.
What, after all, is the World Trade Organization going to say to Beijing as the biggest economy pulls the globe back to 1930? The reference here is to protectionist legislation sponsored by Sen. Reed Smoot and Rep. Willis Hawley, signed into law that year by Herbert Hoover.
Perhaps this explains why the Trump gang is playing up the William McKinley comparisons -- anything to keep Hoover's name from trending. All this, of course, raises hope that global markets might set Trump straight. One thing we know Trump really cares about is Wall Street. Panicky investors might be the only constituency that gets Trump to turn tail.
How fast might that happen? Within a day or two? Talk about a first-month-on-the-job challenge for Treasury Secretary Scott Bessent. Just about the only thing his former hedge fund peers may be shorting more aggressively than the yuan is U.S. share prices.
If Bessent really is the moderating, less MAGA-ish presence in Trumpworld that optimists hope, now's the time to prove it. Reports that Bessent gave Trump benefactor Elon Musk and his representatives access to the federal payments system has Asian governments in a whirl. Tech bros gaining access to Washington's financial plumbing?
This matters because while the U.S. built a highly competitive economy, Asian central banks effectively hold the deed. If markets got wind that China suddenly worried about the sanctity of its $770 billion of Treasuries and began selling, look out. Japan holds more than $1.1 trillion.
Tokyo, remember, arguably took more hits from the Trump 1.0 tariffs than Xi's economy. The sharp drops in shares of Japanese car makers and their suppliers on Monday was a reminder enough of that.
If you're China, though, is Trump going with tariffs at only 10% good news? Perhaps, if Beijing reads it as a gesture of goodwill. Trump appears to be sparing China for now, betting Xi's team comes up with a list of pre-emptive concessions. The Wall Street Journal reports that China is readying an opening bid to placate Trump.
Yet the better gesture might be to talk with Xi's men first before exacting a flesh wound. After a dozen years in power bending China Inc. to his will, Xi won't take kindly to an all-sticks-no-carrots strategy from Trump's trade negotiators.
Xi no doubt learned much from observing Trump's chaotic style from 2017 to 2021. Hence Beijing's plan, according to the Journal, to essentially restore the "Phase One" trade pact signed in 2020. This suggests Beijing isn't mulling gifting Trump the grand deal he craves. Xi's strategy seems more of the run-out-the-clock variety -- once again.
It's entirely possible, too, that Trump just incentivized China to think even bigger about ways to retaliate. Or, more strategically in the Canadian sense. Trumpworld seemed caught off guard by Prime Minister Justin Trudeau's government actively targeting red states with Ottawa's tariffs.
China could do the same with its agricultural purchases. It could tax goods being sourced by Amazon, Costco, Target, and Walmart. Beijing could wreck Musk's 2025 by denting Tesla. Along with electric vehicles for China, Musk's Shanghai "gigafactory" is a major producer of EVs going to third countries.
Xi's men could slap across-the-board taxes on iconic American companies from Boeing to General Motors to John Deere to Starbucks. China could tax, block business transactions or even seize the assets of Apple, Microsoft, Nike and other household name companies.
As Asia said loud and clear Monday, this trade war couldn't be worse timed for a globe on edge. Plunging markets might be the only way to get Trumpworld to back off. It's a super-expensive communication strategy, but it's where international markets find themselves as Trump 2.0 upends the game.
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(END) Dow Jones Newswires
February 03, 2025 09:12 ET (14:12 GMT)
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