Top Trump Tariff Threats
Internal dynamics within BRICS argues against a BRICS currency due to divergent economies and structures, though BRICS could one day look to have a payment system. Nevertheless, the threat of tariffs on BRICS if they form a new currency will also likely help the USD against EM currencies in H1 2025, but could annoy BRICS members enough to see more reserve diversification from the USD multi-year. However, Donald Trump’s success with Mexico and Canada threats increases the prospect of more tariff’s threats in H1 against China and potentially the EU. This can weaken EM currencies in H1 2025.
President elect Trump over the weekend threatened 100% tariffs on BRICS members if they seek to form a BRICS currency. What will be the reaction of BRICS countries?
Figure 1: U.S. Treasury and Bill Holdings (USD Blns)
| China | 772 |
| India | 247 |
| Brazil | 234 |
| HK | 233 |
| Saudi Arabia | 144 |
Source: U.S. Treasury/Continuum Economics
A BRICS single currency remains highly unlikely. Though Brazil and China are middle income countries, their trade and economic structure differ. Meanwhile, India is still on a rising GDP capita profile in the next 20 years towards a middle-income country, while South Africa focus is domestic reform and Russia remains a commodity-based economy. Thus President elect Trump threat of a 100% tariff if BRICS form a competiting currency to the USD is unlikely to be implemented. Nevertheless, individual BRICS countries are interested in enhancing CNY or INR based payment systems and one day BRICS could cooperate to launch a BRICS payment system – though this is not going to happen in 2025/26. However, these Trump threats will annoy BRICS countries as this is not just about trade, but also a threat to BRICS ambitions to grow individually and as a group. This could accelerate reserve diversification of some BRICS countries (Figure 1).
Nevertheless, Trump’s willingness to use tariff threats reflects his core values and a sense of victory over Mexico and Canada, with the Mexican president providing reassurances on immigration cooperation and Canada PM seeking to diffuse the tariff threats on immigration. This makes it highly likely that Trump will threaten trade related tariffs once he takes office after the January 20 inauguration. Number one target will be China, where Trump could threaten say 30-40% tariffs against all China goods, compared to the current average of 20%. This would leave the maximum threat of 60% in reserve. Experience from 2018-19 (here) suggests that Trump does follow-through on some of his tariff threats, but escalates and tries a step-by-step approach to increase pressure to get trade concessions – the art of the deal! China is unlikely to capitulate in weeks but could agree a deal by Q4 2025. This could mean a U.S./China trade war in H1 2025, which would have indirect global spill over. The other two targets for trade threats in H1 could be EU here (trade deficit and Trump’s loathing of EU) and Vietnam (U.S. trade deficit (here)). All of this helps the USD against EM currencies from a sentiment standpoint, but also as it produces inflation concerns and get the market concerned that the Fed could stop easing close to 4%. With Yuan depreciation highly likely on any extra U.S. tariffs, this could see EM currencies weak in H1 2025. However, the USD is already overvalued and by H2 EM currencies will likely be recovering.