Asia Advances in Trade Talks with U.S. as Europe and North America Adopt Cautious Approach

Economic

Summary:

Asian countries are leading in negotiations with the U.S. to avoid high retaliatory tariffs, while North American and European partners are proceeding more cautiously, weighing the risks of hasty deals....

Asian economies move swiftly under tariff pressure

Facing imminent tariff hikes of up to 25% within the next two months, major Asian exporters like South Korea, Japan, India, Vietnam, and Thailand have accelerated negotiations with the United States to secure temporary or partial trade deals before the 90-day grace period expires in early July. South Korea, where exports face significant risks, is particularly proactive, with U.S. Treasury Secretary Scott Bessent signaling that a memorandum of understanding (MOU) could be reached as early as this week.

This rapid progress is driven by clear economic incentives: as punitive tariffs loom, early agreements offer a chance to preserve market access and provide political wins for President Donald Trump, who is eager to showcase the success of his disruptive trade agenda. The urgency correlates directly with the heavy reliance of these economies on U.S. market access, creating an asymmetrical risk that compels faster negotiation.

Divergent strategies among Asian players

South Korea’s approach focuses on expanding access for U.S. goods, reducing non-tariff barriers, and pledging greater investment into American industries such as shipbuilding and energy. Meanwhile, India has made the most notable strides, concluding a negotiation framework across 19 sectors including agriculture, e-commerce, and rules of origin after a high-profile meeting between Vice President JD Vance and Prime Minister Narendra Modi.

Japan, while engaging actively, is more cautious. It shows willingness to make agricultural concessions and promote automotive investment but resists being drawn into an overt anti-China bloc, reflecting its intertwined trade interests with Beijing.

Vietnam, Thailand, and other Southeast Asian nations are also offering concessions, including increased imports of U.S. agricultural and energy products, while demanding that agreements maintain a two-way balance to avoid one-sided economic dependencies.

Western partners adopt a slower, risk-averse strategy

Contrasting with the swift Asian engagement, North American and European allies are moving with deliberate caution. Despite facing base tariffs of 10% and warnings of possible hikes, Canada, the United Kingdom, and the European Union are prioritizing careful assessment over speed. They argue that rushed deals could lead to unfavorable terms, citing the volatility and unpredictability of Trump’s negotiating style.

European officials acknowledge that absent progress, tariffs could increase further, yet remain skeptical about securing meaningful concessions under current conditions. Retaliatory strategies, such as imposing duties on U.S. steel and aluminum imports, are already in preparation.

Switzerland, facing a steeper 31% tariff, stands as an exception among European nations. It has entered priority negotiations with the U.S., securing assurances that its tariff rate will be capped at 10% during talks, even if discussions extend beyond the initial deadline.

Structural dynamics shaping negotiation timelines

The contrasting speeds reflect deeper strategic considerations. For Asian economies, immediate tariff exposure threatens significant disruptions to export-driven growth models, necessitating urgent countermeasures. For Europe and North America, the relatively smaller immediate exposure allows room for strategic patience, with an eye toward longer-term stability rather than short-term tactical gains.

Moreover, the fragmented structure of U.S. trade policy under the Trump administration—marked by leadership turnover and abrupt strategic pivots—further incentivizes caution among traditional allies, wary of investing political capital without guaranteed outcomes.

Asia’s urgency versus the West’s patience

The unfolding dynamics highlight a critical divergence in global trade diplomacy. Asian economies, highly vulnerable to tariff shocks, are pressing for quick interim deals to protect their economic interests, while North American and European partners are betting on a more measured pace to avoid strategic missteps.

Whether these divergent tactics will pay off depends largely on Trump’s political calculus and the evolving global trade environment. What is clear is that in this new tariff-driven landscape, speed and strategy are equally crucial—and the costs of miscalculation could reshape trade flows for years to come.

Source: The Financial Express

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Gerik

Forex

Economic

The Swiss franc’s surge reignites monetary policy tensions

The Swiss franc has soared to its highest level against the U.S. dollar in over a decade, as investors seek safe-haven assets amid escalating global trade disruptions. This rapid appreciation, pushing the USD/CHF exchange rate near 0.80—levels not seen since 2015—is now pressuring the Swiss National Bank (SNB) to consider drastic measures, including lowering its benchmark interest rate to zero or even negative territory once again.

The challenge for Swiss policymakers is intricate: they must curb the franc’s strength to protect an export-oriented economy without provoking retaliatory trade measures from the United States, which has previously accused Switzerland of currency manipulation.

Interest rates under downward pressure as economic risks mount

Short-term Swiss government bond yields have already dipped below zero in anticipation of SNB action, with two-year yields turning negative last Friday. Market swaps are now pricing an 80% probability that the SNB will cut its policy rate to 0% at its June meeting, and potentially push it below zero by year-end.

Analysts point to a clear cause-and-effect pattern: the franc’s appreciation exacerbates deflationary risks and undermines export competitiveness, necessitating monetary easing. Switzerland's annual inflation rate stands at just 0.3%, perilously close to the lower bound of the SNB’s 0–2% inflation target, reinforcing the urgency for action.

Currency interventions viewed as a risky last resort

Despite the mounting pressure, direct currency intervention remains a politically sensitive option. Switzerland still bears the scars of being labeled a currency manipulator by the U.S. Treasury under Trump’s first term, though the designation had no immediate punitive consequences.

Experts like Stefan Gerlach from EFG Bank argue that while moderate foreign exchange intervention may still occur, it would only be used sparingly. Cutting interest rates is perceived as a safer diplomatic strategy, minimizing the risk of reigniting American accusations while still addressing domestic economic pressures.

Athanasios Vamvakidis of Bank of America even suggests that minor, well-calibrated intervention could be tolerated by the current U.S. administration, given the defensive context of Switzerland’s monetary adjustments.

Trade frictions deepen Switzerland’s monetary dilemma

Adding to the pressure, Washington recently imposed a 31% retaliatory tariff on Swiss goods—higher than those applied to EU exports—before suspending the measure for 90 days following high-level diplomacy between Swiss President Karin Keller-Sutter and U.S. officials.

Given that the U.S. accounts for more than 10% of Swiss exports, maintaining favorable trade relations is critical. Swiss leaders are keen to avoid any moves that might be construed as competitive devaluation, making a policy-driven interest rate cut a more palatable option than direct currency market interventions.

A delicate balancing act between growth, diplomacy, and financial stability

Switzerland is rapidly approaching a critical juncture. With the franc’s relentless rise threatening deflation and export competitiveness, the SNB is increasingly likely to respond with interest rate cuts, even if it means re-entering negative territory after briefly exiting it in 2022.

The Swiss case illustrates the interconnectedness of monetary policy, geopolitics, and financial market dynamics in today’s fragmented global environment. As fears of a new currency war swirl, Switzerland’s cautious, diplomatically aware approach may set a template for small, open economies navigating between domestic stabilization and international political pressures.

Source: FT

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Catherine Richards

Economic

Treasury Secretary Scott Bessent speaks, Wednesday, April 23, 2025, to the Institute of International Finance Global Outlook Forum at the Willard Hotel in Washington.

President Donald Trump suggested Sunday that his sweeping tariffs would help him reduce income taxes for people making less than $200,000 a year, as public anxiety rises over his economic agenda.

Trump has previously argued that tariff revenue could replace income taxes, though economists have questioned those claims.

“When Tariffs cut in, many people’s Income Taxes will be substantially reduced, maybe even completely eliminated. Focus will be on people making less than $200,000 a year,” he said Sunday on his Truth Social network.

Trump’s tariff stances have roiled markets, led to fears of higher prices for Americans, prompted recession warnings and sparked bouts of concern about the US’s haven status — a fear that Treasury Secretary Scott Bessent questioned in a Sunday interview.

“I don’t think that this is necessarily losing confidence,” Bessent said on ABC’s This Week. “Anything that happens over a two-week, one-month window can be either statistical noise or market noise.”

Trump’s administration is “setting the fundamentals” for investors to know “that the U.S. government bond market is the safest and soundest in the world,” he said.

For now, a CBS News poll released Sunday said 69% of Americans believe the Trump administration wasn’t focused enough on lowering prices. Approval of Trump’s handling of the economy in the poll declined to 42% compared with 51% in early March.

Trump wants to extend reductions in income taxes that were approved in 2017 during his first presidency, many of which are due to expire at the end of 2025.

He also has proposed expanding tax breaks — including by exempting workers’ tips and social security earnings — while slashing the corporate tax rate to 15% from 21%.

Trade Deals

Bessent said the administration is working on bilateral trade deals after Trump imposed so-called reciprocal tariffs on many countries in early April, which he subsequently paused for 90 days for all affected countries except China.

The effort involves 17 key trading partners, not including China, Bessent said on ABC.

Treasury Secretary Scott Bessent speaks, Wednesday, April 23, 2025, to the Institute of International Finance Global Outlook Forum at the Willard Hotel in Washington.

“We have a process in place, over the next 90 days, to negotiate with them,” he said. “Some of those are moving along very well, especially with the Asian countries.”

Source: Yahoo Finance

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Catherine Richards

Russia-Ukraine Conflict

Russia hasn’t received a US proposal to give up control of the Zaporizhzhia nuclear power plant in southeast Ukraine, and a change to the facility’s ownership isn’t conceivable, said Foreign Minister Sergei Lavrov.

His comments were consistent with the foreign ministry’s declaration in March that Moscow won’t cede control of the plant or agree to operate the facility jointly with another state.

The currently-defunct atomic plant, Europe’s largest, has been occupied by Russia since the first weeks of Moscow’s full-scale invasion of its neighbor in 2022.

ZNPP, near the town of Enerhodar, is now controlled by Rosatom, Russia’s state nuclear corporation, with monitors from the International Atomic Energy Agency, the UN’s nuclear watchdog, rotated into the facility.

Lavrov said in an interview with CBS’s Face the Nation — conducted last week and broadcast on Sunday — that safety requirements for the plant “are fully implemented and it is in very good hands.”

Ukrainian President Volodymyr Zelenskiy said in March that if the US helped to return the power plant to Ukraine and invest in it, Washington and Kyiv could work together. He estimated it will take years of costly repairs to safely return Zaporizhzhia to operation.

The facility has come up as part of a Trump administration effort to boost cooperation with Russia’s energy sector as it pushes for a deal to end the war in Ukraine, Bloomberg has reported. One proposal would see the US take over the plant, to be considered Ukrainian territory, with any electricity generated supplied to both Ukraine and Russia.

“We never received such an offer,” Lavrov told CBS. “I don’t think any change is conceivable.”

Source: Bloomberg Europe

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Catherine Richards

Political

Iran’s president visited on Sunday the scene of a massive port blast that killed 28 people and injured more than 1,000, as fires still blazed more than 24 hours after the explosion.

The blast occurred on Saturday at Shahid Rajaee Port in southern Iran, near the Strait of Hormuz, through which a fifth of world oil output passes.

With choking smoke and air pollution spreading throughout the area, all schools and offices in Bandar Abbas, the nearby capital of Hormozgan province, were ordered closed on Sunday to allow authorities to focus on the emergency effort, state TV said.

The health ministry urged residents to avoid going outside “until further notice” and to use protective masks.

Arriving in Bandar Abbas, President Masoud Pezeshkian expressed his appreciation to first responders, adding “we have come to see first-hand if there is anything or any issue that the government can follow up on.”

“We will try to take care of the families who lost their loved ones, and we will definitely take care of the dear people who got injured,” he said.
Pezeshkian had previously ordered an investigation into the cause of the blast.

Russia’s embassy said Moscow was sending multiple “aircraft carrying specialists” to help fight the blaze. According to Russia’s Ministry of Emergency Situations, one of the aircraft is a dedicated firefighting plane. The New York Times quoted a person with ties to Iran’s Islamic Revolutionary Guard Corps, speaking on condition of anonymity to discuss security matters, as saying that what exploded was sodium perchlorate — a major ingredient in solid fuel for missiles.

Defense ministry spokesman Reza Talaei-Nik later told state TV that “there has been no imported or exported cargo for military fuel or military use in the area.”

The port’s customs office said in a statement carried by state television that the explosion probably resulted from a fire that broke out at the hazardous and chemical materials storage depot.

A regional emergency official said several containers had exploded. Red Crescent chief Pirhossein Koolivand, in a video shared on the government’s official website, gave an updated toll on Sunday of 28 people killed and more than 1,000 injured.

The ISNA news agency, citing the provincial judiciary, gave a higher toll of 1,242 injured and also put the number of dead at 28.

Koolivand said some of the injured were airlifted for treatment in the capital Tehran.

Thick black smoke was still visible in live footage from the scene aired by state TV on Sunday.

“The fire is under control but still not out,” a state TV correspondent reported from the scene.

The explosion was felt and heard about 50 kilometers away, Fars news agency reported.

Also at the scene on Sunday, Interior Minister Eskandar Momeni said “the situation has stabilized in the main areas” of the port, and workers had resumed loading containers and customs clearance.

Another official on site, Minister of Roads and Urban Development Farzaneh Sadegh, said only one zone of the port was impacted, and cargo “operations are still continuing as normal in the several other zones.” An image from Iran’s Tasnim news agency on Sunday showed a helicopter flying through a sky blackened by smoke to drop water on the disaster-struck area.

Others showed firefighters working among toppled and blackened cargo containers, and carrying out the body of a victim.

The authorities have closed off the roads leading to the site, and footage from the area has been limited to Iranian media outlets.

Beijing’s foreign ministry said in a statement to AFP on Sunday that three Chinese victims were in a “stable” condition.

The United Arab Emirates expressed “solidarity with Iran” over the explosion and Saudi Arabia sent condolences, as did Pakistan, India, Turkiye and the United Nations as well as Russia.

The Tehran-backed Lebanese movement Hezbollah also offered condolences, saying Iran, with its “faith and solid will, can overcome this tragic accident.”

In the first reaction from a major European country, the German embassy in Tehran said on Instagram: “Bandar Abbas we grieve with you.”

Authorities declared a day of national mourning on Monday, and three days of mourning in Hormozgan province from Sunday.

The explosion ripped through the port as Iranian and US delegations were meeting in Oman for high-level talks on Tehran’s nuclear program, with both sides reporting progress afterwards.

While Iranian authorities so far appear to be treating the blast as an accident, it also comes against the backdrop of years of shadow war with regional foe Israel.

According to the Washington Post, Israel in 2020 launched a cyberattack targeting the Shahid Rajaee Port.

Source: ARAB

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Thomas

Economic

What is a trade deficit?

A trade deficit occurs when a nation imports more than it exports. For instance, in 2024 the United States exported nearly $3.2 trillion in goods and services to the world, while it imported $4.1 trillion, leaving an overall trade deficit of more than $900 billion. The deficit in goods, at $1.2 trillion, is higher than the total deficit, since a portion of the goods deficit is offset by the surplus in services trade. Services, such as tourism, intellectual property, and finance, make up roughly one-third of exports, while major goods exported include aircraft, refined petroleum and other fuels, and transportation equipment. Meanwhile, imports are dominated by capital goods, such as computers and telecom equipment; consumer goods, such as apparel, electronic devices, and automobiles; and crude oil.

It is important to differentiate a country's overall, or global, trade deficit from its bilateral trade deficits. The United States has both a large overall deficit in its trade with the rest of the world and substantial bilateral deficits with a number of individual countries. But it is possible for a country to have bilateral deficits with certain countries, surpluses with others, and balance in its overall trade with the world. In other words, even if the United States were to “fix” its overall trade deficit, it could—and likely would—have bilateral deficits with some countries. (One way to think about this is to consider the financial situation of individual consumers, who could spend no more overall than they earn but still have “bilateral deficits” with their grocer or barber and a “bilateral surplus” with their employer.)

What causes a country's overall trade deficit?

The fundamental cause of a country's overall trade deficit is an imbalance between its savings and investment rates. As economists explain, the reason for the deficit can be boiled down to the United States as a whole spending more money than it makes. That additional spending has to, by definition, go towards foreign goods and services. Financing that spending happens in the form of either borrowing from foreign lenders or foreign investing in U.S. assets and businesses.

Economists generally see these factors as more important than trade policy in determining the overall deficit. That's because making it easier or harder to trade with specific countries tends to simply shift the trade deficit to other trading partners. Thus, economists warn against conflating bilateral trade deficits, which reflect the particular circumstances of trading relationships with specific countries, with the overall trade deficit, which reflects underlying forces in the economy.

How has the U.S. trade deficit changed over recent decades?

Today's $918.4 billion overall U.S. trade deficit, representing about 3.1 percent of gross domestic product (GDP), is down from a 2022 peak of more than $944 billion, which at the time was around 3.7 percent of GDP. The deficit has averaged $594 billion since 2000, much higher than in previous decades, when it accounted for well below 2 percent of GDP. The United States ran either a surplus or a small deficit through the 1960s and 1970s, after which a large deficit opened in the 1980s and continued to expand through the 1990s and 2000s.

The largest U.S. bilateral trade imbalance by far is with China. The United States ran a $295 billion goods deficit with China in 2024 (partially offset by a U.S. services surplus with China of $32 billion). The next largest contributor to the goods deficit, at $235 billion, is the European Union, followed by Mexico at $172 billion, Vietnam at $123 billion, and Taiwan at $73.9 billion.

The U.S. Trade Deficit: How Much Does It Matter?_1

The trade deficit with China expanded dramatically beginning in the early 2000s from an average of $34 billion in the 1990s. Some economists refer to this as the “China Shock” and attribute it to the unexpectedly rapid growth in China's exports of manufactured goods to the United States in the late 1990s and early 2000s. This happened as Beijing undertook deep economic reforms and implemented policies to subsidize production, accelerate industrialization, and boost exports. Economists also note the acceleration of Chinese export growth after the country's entry into the World Trade Organization (WTO) in 2001.

More recently, China has experienced another export surge, leading to what CFR senior fellow Brad W. Setser calls the “Second China Shock.” This second massive wave of Chinese exports is caused in part by the large increase in global demand for goods due to the COVID-19 pandemic, decreased domestic demand in China, and China's increased competitiveness in the world market due to the government's strategic investments in high growth sectors (e.g., semiconductors, clean energy, electric vehicles).

These factors help explain China's contribution to the overall U.S. trade deficit, as well as the deficit’s concentration in the manufacturing sector. U.S. manufacturing employment dropped from 31 percent of private sector employment in 1970 to 9.7 percent in 2023, a fall that economist Kyle Handley says was accelerated by Chinese competition. However, he agrees with many economists that the bulk of the reduction of labor in the manufacturing sector can be attributed to automation, productivity increases, and demand shifts from goods to services.

Why are some policymakers concerned about trade deficits?

President Trump, who campaigned for his second term on ending trade imbalances, argues that trade deficits threaten U.S. economic and national security and blames “unfair and unbalanced” trade agreements with countries like Canada, China, and Mexico for causing the growing overall deficit.

Peter Navarro, senior counselor to the president for trade and manufacturing, believes that the overall trade deficit threatens national security, in that the United States depends on foreign debt and foreign investment to finance it. Navarro has referred to the trade deficit as “a brake and bridle on both GDP growth and real wages in the American economy while encumbering the U.S. with significant foreign debt.”

In his executive order imposing reciprocal tariffs, President Trump cited large and persistent goods deficits as evidence of the lack of reciprocity in bilateral trade relationships. Trump blamed the deficits for hollowing the U.S. manufacturing base, hindering scaling of U.S. advanced manufacturing, threatening critical supply chains, and reducing the U.S. defense-industrial base to dependence on foreign adversaries.

Trump's team calculated reciprocal tariffs in addition to the standard 10 percent for every country by taking their bilateral trade deficit in goods as a share of their total exports to the United States and dividing by two. CFR President Michael Froman, a former U.S. trade representative, explains that the Trump administration's approach to calculating reciprocal tariff rates assumes that the bilateral trade deficit is “a catch-all quantitative measure of unfair trade practices, not a reflection of comparative advantage.”

Some Democratic lawmakers, labor groups, and manufacturers also criticize trade deficits on the grounds that some foreign countries—especially China—have used unfair practices such as currency manipulation, wage suppression, and government subsidies to boost their exports, while blocking U.S. imports. Brookings researchers Joshua P. Meltzer and Margaret M. Pearson identify China's overcapacity as “linked to China's increasingly mercantilist approach to trade” and suggest the United States should “rebuild a global rules-based trading system” to address China's practices, while also acknowledging the importance of a continued U.S.-China trade relationship.

The deficit's concentration in the manufacturing sector has heightened concerns among some economists over job losses and their repercussions in local communities. Research by the Economic Policy Institute suggests that the surge in Chinese imports lowered wages for non-college-educated workers and cost the United States 3.7 million jobs from 2001–2018. One study from Stanford University found that the China Shock accounted for 59.3 percent of all U.S. manufacturing job losses over a similar period (2001–2019).

Some economists worry about the consequences of large and persistent imbalances. In 2017, the Peterson Institute's Joseph Gagnon warned that the debt necessary to finance the overall trade deficit was heading toward unsustainable levels. Former Federal Reserve chair Ben Bernanke and Jared Bernstein, chair of the Council of Economic Advisors under President Biden, have argued that the large inflows of foreign capital that accompany trade deficits can lead to financial bubbles and could have contributed to the U.S. housing crash that began in 2006. Jeff Ferry from the Coalition for a Prosperous America notes that a growing trade deficit has been associated with a weak economy, as in the early 2000s, which he says is evidence of the potential for a large trade deficit to drain demand from the domestic economy and slow growth when the economy is performing under its potential.

Some economists worry about the consequences of large and persistent imbalances. The Peterson Institute's Gagnon warns that the debt necessary to finance the deficit is heading toward unsustainable levels. Former Federal Reserve chairman Ben Bernanke and Jared Bernstein, an economic advisor to Presidents Bill Clinton and Barack Obama, have argued that the large inflows of foreign capital that accompany trade deficits can lead to financial bubbles and may have contributed to the U.S. housing crash that began in 2006. Others note that a growing deficit has been associated with a weak economy, as in the early 2000s, which they say is evidence of the potential for a large deficit to drain demand from the domestic economy and slow growth when the economy is performing under its potential.

What are the arguments against focusing on the deficit?

Many economists say the overall trade deficit is not itself a problem for the U.S. economy. That's because a larger trade deficit can be the result of a stronger economy, as consumers spend and import more while higher interest rates make foreign investors more eager to place their money in the United States.

CFR Fellow Inu Manak challenges the Trump administration's assertion that “trade deficits mean you lose, and surpluses mean you win.” She says that Trump's narrow focus on trade in goods, which disregards the services surplus, is particularly unhelpful.

“It is false to suggest that the trade deficit is somehow reflective of trade barriers, and the administration's cherry-picking of the data (which excludes services where the United States has a surplus) further points to the arbitrary nature of its claims,” Manak wrote, while questioning the legal basis of Trump's tariff policies.

Some economists argue that the singular role of the U.S. economy in providing liquidity to the global economy and driving demand around the world makes a U.S. trade deficit important to global economic stability. The dollar's role as the global reserve currency and primary tool for global transactions means that many other countries rely on holding dollar reserves, creating massive demand for U.S. financial assets. This means that the United States pays little for its foreign borrowing, allowing it to finance its high consumption at low cost, which boosts global demand.

Other economists warn that increasing trade restrictions in the interest of moving toward U.S. trade surpluses could lead to lower global growth, inflation, and more economic instability among U.S. trade partners. CFR's Benn Steil and Elisabeth Harding also flag the potential reduction in real GDP growth due to protectionist trade policies.

Many economists worry that too much focus on trade deficits could lead to a revival of protectionism and a new global trade war that would make everyone worse off, especially in an era of supply chains that cross many borders. Maurice Obstfeld, senior fellow at the Peterson Institute, pushes back against the idea that job losses in manufacturing are connected to the trade deficit and further challenges the argument that tariffs will improve the trade balance or create manufacturing jobs.

Stephen J. Rose of the Center for Strategic and International Studies says government promises that restrictions on imports from China or elsewhere will revive manufacturing ignore the fact that technological progress plays a much larger role in deindustrialization than does trade. In fact, the U.S. economy began shifting away from manufacturing long before the proliferation of trade agreements in the 1990s, Rose explained.

Instead, the Peterson Institute's Mary Lovely says it is better to recognize that trade deficits are neither all good or all bad but rather involve trade-offs: the U.S. economy benefits from foreign goods and investment even as a high deficit displaces some workers and adds to the national debt.

What policy options have been proposed to reduce trade deficits?

Imposing high tariffs. President Trump has repeatedly promised to reduce trade deficits by imposing high tariffs on foreign trading partners, a key pillar of his economic platform. Commerce Secretary Howard Lutnick says using broad-based tariffs will help create “reciprocity, fairness, and respect.” Some economists say negotiating better access to the Chinese market for U.S. exporters could help reduce the bilateral deficit but warn that additional tariffs will make China less likely to grant extended access to U.S. firms.

In contrast to the Trump administration's approach, Gagnon says that data show “tariffs have little direct impact on deficits.” He says higher tariffs lead to both reduced imports and exports, as well as less total income, noting that tariffs “ultimately lead to less business innovation, slower productivity growth, and lower household living standards.”

Reducing the fiscal deficit. As an alternative to tariffs, Gagnon argues for using fiscal and exchange rate policy to reduce the trade deficit. He emphasizes “reducing the fiscal deficit and pushing down the overvalued dollar,” arguing that a weaker dollar would likely boost U.S. exports.

Boosting U.S. exports. CFR Senior Vice President and Director of Studies Shannon O'Neil emphasizes the importance of boosting U.S. exports to reduce deficits, return higher-paying jobs, and increase innovation. She argues that pulling back from trade agreements and using sweeping tariffs on imports undercut the potential for U.S. exporters to succeed because they are excluded from access to cheaper inputs. Instead of focusing on reducing imports through protectionist policies, a more effective strategy could be to increase U.S. exports.

Amending U.S. tax law. Alexander Raskolnikov, Wilbur H. Friedman professor of tax law at Columbia Law School, and CFR's Steil write that one way to address the deficit with China is by amending American tax law.

Current U.S. tax law treats foreign investors in the United States, including Chinese investors, more favorably than domestic investors. The resulting influx of foreign capital contributes to the trade deficit. Raskolnikov and Steil write: “If the U.S. tax subsidy for the import of foreign capital were eliminated, Chinese investors would have less motivation to outbid Americans for U.S. assets and, by extension, less incentive to dump goods in this country in return for dollars.”

Though it would not be a silver bullet, amending U.S. tax law and eliminating subsidies for foreign portfolio investment could moderately reduce the deficit without the downsides associated with tariffs and other protectionist measures.

CFR's Setser argues that the United States should reform its corporate tax code to limit offshoring and disincentivize profit shifting, especially in the pharmaceutical industry. Internationally, the United States and its allies should create subsidy sharing agreements in key sectors (e.g. electric vehicles and steel), expanding the market share for both U.S. and allies' firms while lowering costs.

Pressing for reforms in surplus countries. Economic reforms in surplus nations could also help. Gagnon and C. Fred Bergsten from the Peterson Institute argue that the United States should pressure countries that use foreign reserve purchases to manipulate their exchange rates by having the U.S. government counter-purchase the foreign currencies of manipulating nations. CFR's Setser says that policymakers should pressure China and other Asian countries to enact policies to raise their domestic consumption.

Cutting U.S. domestic spending and boosting the savings rate. In the domestic policy arena, boosting the U.S. savings rate could also bring down the trade deficit. As the International Monetary Fund and others have pointed out, one of the most direct ways to do that is to reduce the government budget deficit. Early in his second term, Trump established the Department of Government Efficiency (DOGE) ostensibly to reduce federal spending and lower the budget deficit. While there is widespread agreement that efficiencies could be found in spending on government operations, the reality that most federal spending goes to defense, entitlements, and interest on the debt make many question whether efforts like DOGE will make much of a dent in the overall budget deficit.

Source: CFR

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Samantha Luan

Commodity

Economic

After a stellar year in 2024, we expect gold to continue its strong performance in 2025 as trend signals are bullish, and fundamentals are also supportive. Although the gold price has already increased by around 10% year-to-date at the time of writing, we maintain a bullish stance over the medium-to-long term and see gold as a great source of diversification, especially against an unwanted and unexpected drift lower in USD. Here are three reasons that support our positive view on gold.

Rising demand from central banks

The US dollar's share of central banks' reserves is steadily falling while holdings in gold are rising. Geopolitics is a major factor, with setbacks in globalisation due to rising trade tensions coinciding with a build-up in gold reserves. Central banks want to diversify away from USD, but as there is no credible alternative currency, they are opting for gold. A further accumulation of gold seems likely, and investors can potentially benefit by adding gold to their portfolio.

A hedge against geopolitical uncertainty

The strong performance of gold appears to be driven by its safe haven properties during periods of market turbulence and elevated geopolitical risk. Geopolitical uncertainty has remained high in recent times due to multiple regional conflicts and tariffs imposed and announced by the Trump administration.

From our historical scenario analysis covering January 2005 to February 2025, we can see strong evidence of gold being a more effective tail risk hedge than global aggregate bonds in almost all of the historical scenarios considered.

Higher return for the same amount of risk

Adding gold to a multi asset portfolio allows investors to achieve a greater level of return for the same amount of risk. We can see in the chart that a portfolio holding only bonds and equities is sub-optimal compared to a portfolio that also holds gold. The efficient frontier constructed with a fixed 10% allocation to gold lies above the efficient frontier constructed from an allocation to solely bonds and equities. When the position in gold is unconstrained, most of the points lie above the efficient frontier for an equity-bond only portfolio.