While tax cuts and ‘repeal and replace’ of the Affordable Care Act may be the domestic focus of the Trump administration’s policy agenda, foreign policy pronouncements have emphasized changes to current trading arrangements.

While nothing substantive has been announced as of yet, one would have to have been living under a rock to have been surprised by the news that the Trump administration started its first full week in office by looking for a negotiation of the North American Free Trade Agreement (NAFTA) and withdrawing from the Trans-Pacific Partnership (TPP).

There are many facets of Trump’s trade policy that ape the characteristics of a schoolyard bully, and bullies do not pick on people that can fight back; they pick on the weaker kids. China can fight back; China holds trillions of dollars of U.S. debt. But Mexico is not as powerful and we think that Trump will pick the easier fight.

Mexico is so dependent on the United States that total trade with the U.S. was five times that of the second-most important trading partner, China. This has been reflected in the moves within currency markets; since Election Day, the Mexican peso has fallen by 14% while the Chinese yuan has only lost around 0.5%.

Mexico is to the United States as a remora is to a nurse shark; they benefit each other but the remora is never going to grow larger than the shark. China is not a remora, however, and two sharks of equal size are now circling each other in the Pacific. 

In fact, there is a lot of belief that China can stand to benefit from an antagonistic United States as those countries in Asia that had pivoted to the U.S. under the Obama regime (Singapore and the Philippines) now look for succor and strength from a China that is happy to portray itself as a global superpower and not an insular one.

Certainly, the rhetoric has been ramped up by Commerce Secretary Wilbur Ross in his confirmation hearing and we are looking for the pressure to increase in the coming weeks. The relationship between China and the U.S. will be the relationship that defines the Trump presidency and the 21st century, unfortunately we think that Mexico in this case will be viewed as collateral damage. 


Jeremy Cook is the Chief Economist at World First UK and one of the UK’s leading voices on foreign exchange.

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