As Asia braces for the great “Trump trade” adventure of 2025, the lessons from 2024 are fast piling up.
The biggest lesson is how terribly the inflation-is-transitory trade worked out for investors. And for voters and world leaders who don’t relish a Donald Trump 2.0 presidency.
The US inflation surge has many fathers — from post-Covid supply chain disruptions to excessively low interest rates to an explosion of over-the-top government stimulus. But Trump’s reelection is the mother-of-all side effects from fiscal and monetary policies run amok.
And Asia has the ultimate front-row seat for what’s to come as Trump retakes the reins with very big — and controversial — plans.
Most of the focus is on the Trump 2.0 trade war to come. But far more attention should be on the fireworks sure to come as Trump’s policy promises collide with a fiscal train wreck unfolding in slow motion.
On January 20, Trump will inherit a national debt exceeding US$36 trillion. And, depending on which pundit you follow, Trump is either about to explode the debt in wildly disruptive ways via massive tax cuts – or, given the giant scalpel Trump has handed Elon Musk, slash it aggressively.
Either outcome could pose huge risks for global markets.
Door No. 1 could see the US debt zooming toward US$40 trillion and credit rating companies pouncing. Washington could quickly lose its last AAA rating, from Moody’s Investors Service. Asia is directly on the frontlines of the chaos such a downgrade would unleash in bond, stock and currency markets everywhere.
Door No. 2 would see Trump’s Tesla billionaire benefactor trying to trim federal spending by firing government employees here and there. But unless Team Trump is willing to target the military and entitlements like Social Security, Medicare and Medicaid, Musk’s government efficiency unit won’t make a dent.
Far more success would be had focusing on deregulation and over-the-top subsidies on industries like those on which Musk’s private companies rely. It was a lack of investment in productivity-enhancing sectors and technologies that left the US so susceptible to inflation.
“With Trump and some likely appointees focused on reducing bilateral deficits,” says Andrew Tilton, an economist at Goldman Sachs, “there is a risk that — in a sort of ‘whack-a-mole’ manner — burgeoning bilateral deficits could eventually prompt US tariffs on other Asian economies.”
Tilton adds that “Korea, Taiwan and, especially, Vietnam have seen large trade gains versus the US,” something Trump 2.0 isn’t likely to let slide. As such, Asia’s top trading nations may try to narrow surpluses to “deflect” Team Trump’s attention away from them.
Barclays Bank economist Brian Tan adds that “trade policy is where Mr. Trump is likely to be most consequential for emerging Asia in his second term as US president,” inflicting “greater pain” on more open economies.
Suffice it to say, America’s debt excesses also will challenge — and most likely plague — the Trump 2.0 era in ways the president-elect doesn’t seem to realize.
If ever there were a buckle-your-seatbelt moment for Asia, 2025 is it. The combination of runaway debt and inflation will limit the Federal Reserve’s ability to continue cutting rates. And even if Fed Chairman Jerome Powell tries, fiscal realities will result in higher-than-hoped long-term rates.
One of the quandaries facing the Fed is the health of the banking system. Banks have been huge buyers of Treasury securities. Will institutions run into stability troubles if medium and long-term government debt yields fall faster than expected?
This could trigger supply issues, too. It’s reasonable to question whether banks can continue to buy Treasuries if interest rates move too low too fast.
Part of Asia’s problem is it’s unclear which Trump will enter the White House roughly a month from now, says Yanmei Xie, economist at Gavekal Dragonomics.
“The problem with interpreting trade policy in a second Trump administration is that key Trump advisors have proclaimed two very different visions, and Trump himself has offered qualified support to both,” Xie notes. The common feature is tariffs or the threat of tariffs: 60% or more on China and 10-20% on the rest of the world. But to what end?”
One possibility, she says, is that Trump will go with his once and possibly future trade czar, Robert Lighthizer, in pushing for a rapid, across-the-board disengagement from China.
“Trump,” Xie says, “promised a four-year plan to phase out all Chinese imports of essential goods — everything from electronics to steel to pharmaceuticals – and vowed to include strong protections to ensure China can’t circumvent restrictions by passing goods through conduit countries. In this scenario, there would be a ramping-up of coercive pressure on allies to join in the anti-China agenda.”
Another possibility is that Trump uses the threat of tariffs as negotiating leverage to cut a deal with China, although the content of any such deal is very unclear. “This is the approach favored by Scott Bessent” – Trump’s pick for Treasury secretary – “who claims that Trump is in fact ‘a free trader’ who will deploy tariffs to escalate to de-escalate,” Xie notes.
Another major Trump wild card is a US dollar devaluation, which many Trump advisers see as the fastest way to regain broad-based manufacturing competitiveness.
“China is unlikely to cooperate with this agenda,” Xie says, “but the theory of the across-the-board tariff on all trading partners seems to be that it will also be used as leverage in currency negotiations.”
Trump has indeed talked about a Plaza Accord 2.0 that weakens the dollar versus the yen.
In 1985, US President Ronald Reagan’s Treasury secretary, James Baker, managed to convince the most powerful industrialized nations to push the yen sharply higher and the dollar lower. It was the high-point of Reagan’s mercantilist policy mix, which inspired Trump. The deal was done at the Plaza Hotel, a New York institution that Trump once owned.
Early in the Trump 1.0 years, then-Treasury Secretary Steven Mnuchin and advisors like Peter Navarro hinted at Trump’s desire for a “new Plaza Accord” that would send the Chinese yuan soaring. Now, as Trump 2.0 gears up, Trump seems ready to give the strategy another try.
Chinese leader Xi Jinping would surely refuse. Chinese officials know how the 1985 currency deal precipitated Japan’s asset bubble in the late 1980s, leading to decades of economic stagnation. Many economists also worry that a weaker dollar could send inflation into the stratosphere, while a stronger yuan would slam China’s all-important export engine.
One way Trump might try to engineer a weaker dollar is by commandeering Fed policy decisions. Trump and his advisors have made it clear the Fed’s independence is on the line come January. The “Project 2025” scheme that Republican operatives cooked up for Trump 2.0 includes curbing the Fed’s autonomy.
Jerome Powell, Trump’s handpicked Fed chairman, had a challenging time during Trump 1.0. From 2017 to 2021, Trump cajoled Powell’s team with a verve never before seen from a White House. Trump attacked the Fed in speeches, press conferences and on social media. Trump even mulled firing Powell. That year, the Fed suddenly began cutting rates, adding liquidity to an economy that didn’t need it.
In October, Trump mocked Powell’s policymaking team. “I think it’s the greatest job in government,” Trump told Bloomberg. “You show up to the office once a month and you say, ‘let’s say flip a coin’ and everybody talks about you like you’re a god.”
Trump also argues that presidents have the right to pressure the central bank to do their bidding. “The Federal Reserve is a very interesting thing and it’s sort of gotten it wrong a lot,” Trump said in August. He added that “I feel the president should have at least say in there, yeah. I feel that strongly. I think that, in my case, I made a lot of money. I was very successful. And I think I have a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman.”
Such maneuvers are of particular concern in Asia, where central banks hold the biggest stockpiles of US Treasury securities. Japan alone holds US$1.1 trillion of US debt; China US$770-plus billion. Asia’s largest holders of dollars are sitting on about US$3 trillion worth. The Trump 2.0 presidency could put at risk vast amounts of Asian state wealth.
Trump’s antics here could send the dollar sharply lower. Many investors argue, of course, that continued dollar strength isn’t necessarily great news for the global financial system heading toward 2025 either. The dollar’s “wrecking ball” tendencies have been shaking up global markets in recent years. It sucked up outsized waves of global capital, disadvantaging emerging economies in particular.
Tom Dunleavy, a partner at MV Capital, speaks for many when he says risks posed by this wrecking ball dynamic are “particularly acute in emerging markets” because “they rely heavily on commodities and have debt in dollars.” Oil, most trade and debt are still priced in dollars. And, he says, “The denominator of everything is going up.”
The more crowded a continued-dollar-strength trade gets, regardless of the questionable logic behind it, the bigger the global fallout when disappointed punters run for the exits. The U-turn could be especially chaotic if Trump’s Treasury team works to devalue the dollar. The more inflationary such a maneuver proves to be, the more chaotic it could be.
Economists including former US Treasury Secretary Larry Summers are warning that Trump would be wise to abandon his campaign promises, in order to avoid sending inflation sharply higher.
Summers was right about US inflation being of the longer-lasting variety. Now, he worries that Trump’s plans to impose giant tariffs, cut taxes, deport undocumented workers and mess with the Fed’s mandate will boost inflation.
“If he carries through on what he said during his campaign, there will be an inflation shock significantly greater than the one the country suffered in 2021,” Summers told CNN recently.
Summers worries that the Trump stimulus burst to come could send prices closer to the four-decade high of 9.1% recorded in June 2022. Even if this proves too pessimistic, US inflation is almost certain to dominate the global economy in 2025.
Kelvin Wong, senior market analyst at broker OANDA, says that “the incoming Trump administration’s ‘America First’ policy may see a further escalation of deglobalization that can trigger headwinds to global economic growth and spurt another round of inflationary pressure resurgence.”
Wong notes that the 10-year US Treasury yield may rise faster than the 2-year rate “due to higher inflationary pressures” from Trump’s mercantilist policies.
Far from being transitory, US inflation may be about to get a very powerful second wind, one sure to blow Asia’s way early and often in 2025.
