🚨 Trump's Universal Tariff Application Reduction

Today Korean Economic News | 2025.01.08

📌 Reports of Trump's Universal Tariff Application Reduction... US Dollar↓·Treasury Yields↑

💬 With news of the Trump administration's second term potentially scaling back universal tariff plans, the yield on 30-year US Treasury bonds in the New York market rose to 4.86% at one point, recording the highest level in 14 months, while the 10-year Treasury yield also rose to its highest level since May last year. As a result, the US dollar declined.

1️⃣ Easy to Understand

As news reached the market that President Trump might scale back his original campaign promise to impose tariffs on all imported goods, changes occurred in the financial markets. Let's explain this with an everyday example.

Tariffs are a kind of "tax" imposed on goods coming in from foreign countries. President Trump initially said, "I will impose high taxes on all imported goods," but now there's news that he might change direction to "I will only impose taxes on some products."

For example, if he originally said he would impose taxes on all imported goods such as Chinese smartphones, European cars, and Korean electronics, it could now mean that he will focus taxes mainly on Chinese products while easing them on products from other countries.

Such changes have a significant impact on the US and global economies, particularly manifesting in rising US Treasury yields and falling dollar values. You can think of it as similar to how changes in government policy cause stock markets, exchange rates, and interest rates to fluctuate.

2️⃣ Economic Terms

📕 Universal Tariff

A universal tariff refers to a tariff imposed uniformly on all imported goods without targeting specific countries.

• During the election process, President Trump promised to impose 10-20% tariffs on all imported goods.
• This includes the intention to reduce the US trade deficit and protect domestic manufacturing.

📕 Treasury Yield

Treasury yield refers to the yield on bonds issued by the government.

• The 10-year Treasury serves as a benchmark for medium to long-term market interest rates, while the 30-year Treasury serves as an indicator for long-term investments.
• When Treasury yields rise, borrowing costs for the government, businesses, and individuals increase; when they fall, borrowing costs decrease.

📕 Dollar Value

Dollar value refers to the exchange value of the US dollar against other currencies.

• When the dollar is strong, the same dollar can buy more foreign currency; when it's weak, it can buy less foreign currency.
• The dollar value is influenced by various factors including the US economic situation, interest rate policy, and political stability.

📕 Inflation

Inflation is an economic phenomenon where the general price level rises continuously.

• Tariffs can cause inflation by raising the prices of imported goods.
• Central banks usually adjust interest rates to control inflation, which also affects Treasury yields.

3️⃣ Principles and Economic Outlook

💡 Tariff Policy Changes and Market Reaction

• The possibility of the Trump administration scaling back universal tariffs has given a considerable shock to the market. The original plan to impose high tariffs on all imported goods raised concerns about increased inflationary pressure and contracted global trade. However, news that this plan might be scaled back has somewhat alleviated inflation concerns. Consequently, yields in the Treasury market have risen, which can be seen as reflecting expectations for economic growth. On the other hand, the dollar's value has fallen, which is related to a decrease in safe-haven preference due to easing trade tensions.

💡 Impact of Rising Treasury Yields

• Rising Treasury yields bring various economic ripple effects. First, the government's interest burden increases, putting pressure on fiscal soundness. Second, borrowing costs for businesses and individuals increase, potentially contracting investment and consumption. Third, in the stock market, higher interest rates can have a negative impact on stock prices as they reduce the future earnings value of companies. In particular, the fact that long-term Treasury yields have reached their highest point in 14 months suggests that the market has adjusted upward its expectations for long-term economic growth and inflation.

💡 Impact on the Global Economy

• Changes in US tariff policy have a wide-ranging impact on the global economy. This is particularly important for countries with deep trade relationships with the US, such as China, South Korea, and Japan. If universal tariffs are reduced, the burden on these countries' exports to the US could be eased, but targeted tariffs aimed at specific countries or industries may still be maintained. Additionally, a weaker dollar can affect the competitiveness of export-oriented countries and bring changes to international commodity prices. In the long term, it is expected to act as a significant variable in reshaping the global trade environment and supply chains.

4️⃣ In Conclusion

The possibility of the Trump administration scaling back universal tariffs is having a significant impact on the US economy and global markets. Rising Treasury yields and falling dollar values show the market's immediate reaction to these policy changes.

This change is an important signal that goes beyond simple tariff policy adjustments, affecting the global trade environment, investment flows, and economic strategies of various countries. For countries with high export dependency like South Korea, changes in US tariff policy can have a direct impact on economic growth, requiring close observation.

Market participants need to adjust their asset allocation and investment strategies while monitoring changes in US tariff policy and the resulting reactions in financial markets. Rising Treasury yields may bring short-term losses to bond investors but can provide opportunities for higher yields in the long term. Additionally, a weaker dollar can have complex effects, such as rising commodity prices and lower import prices.

Policymakers need to analyze the impact of these changes on the domestic economy and prepare appropriate response strategies. Maintaining the competitiveness of export companies and managing risks due to exchange rate fluctuations will become particularly important.

Ultimately, the Trump administration's tariff policy still has high uncertainty, and the market will continue to reassess based on final decisions and specific implementation plans. The volatility of Treasury yields and dollar values is likely to remain high for the time being. Investors, businesses, and policymakers should recognize this uncertainty and establish flexible strategies that prepare for various scenarios.