Steering Through Tariff Policies, Inflationary Challenges, and the Dawn of AI Innovation: Ramifications for the Global Economic Landscape

Trump's incremental tariffs have largely aligned with market expectations, rendering their immediate impact relatively manageable. The recent postponement of the cancellation of the "small goods exemption" for Chinese imports underscores the pragmatic limitations imposed by inflationary pressures. Couples of analysis indicated that a 30% tariff (an additional 10% on top of the existing 19%) might elicit a market response akin to the third round of tariffs in April 2019. This is primarily because it aligns closely with anticipated outcomes and its tangible effects remain within control, with an estimated deficit increase of approximately 0.5%, which can be mitigated. While uncertainties may persist in the future, Trump faces his own set of practical constraints in the near term when implementing tariff policies. To achieve long-term political objectives over the next four years or beyond, it is imperative to secure control over Congress in the upcoming midterm elections two years hence. The significance of managing inflation and market stability cannot be overstated in this electoral context. Moreover, Federal Reserve Chairman Powell's term concludes in May 2026, implying that overly aggressive tariff and immigration policies could lead to uncontrolled inflation. In such a scenario, Powell might adopt a more hawkish stance to assert the Fed's independence and combat inflation, thereby impacting the market. These potential burdens could prove insurmountable for Trump in the 2026 midterm elections. Therefore, under the dual constraints of inflation and market realities, a strategy of "raising high and releasing slowly" may be more prudent for tariff and immigration policies, at least until 2026.

However, it is precisely because of these factors—the alleviation of tariff pressures, the quantitative recovery of data during the Spring Festival, and the industry-wide excitement spurred by DeepSeek—that the likelihood of China escalating its short-term policies may be further diminished. According to data from the Spring Festival holiday, despite robust travel demand, average airfare prices fell approximately 10% year-on-year, hotel rates declined roughly 6% on average, and tax-free sales in Hainan decreased by about 16% compared to the previous year. Sales at key retail and catering enterprises monitored by China's Ministry of Commerce increased by 4.1% year-on-year, yet this growth pales in comparison to the National Day holiday in 2024 (a 4.5% increase), the May Day holiday (a 6.8% increase), and the Spring Festival itself (an 8.5% increase). These figures underscore the necessity for sustained policy support.

To tackle the pressing issues of the current accumulated output gap and credit contraction, a comprehensive fiscal deficit in the range of 7 to 8 trillion yuan may be required. This deficit should be implemented as a one-time measure (not spread over multiple years) and represent additional spending (distinct from existing expenditures under the same account). According to calculations, the currently known scale within the same parameters stands at approximately 3 trillion yuan (if the deficit ratio is raised to 4%, this would correspond to about 1 trillion yuan, plus an additional 2 trillion yuan from debt conversion in the current year). Given the "realistic constraints" such as leverage level restrictions, downward pressure on interest rates, and limited room for currency depreciation, incremental stimulus measures may indeed be necessary; however, excessively high expectations may not be pragmatic. In contrast, the development prospects of the AI industry hold greater significance, and the importance of a systematic reassessment of Chinese assets cannot be overstated. Nonetheless, making a definitive judgment at present remains challenging.

For the United States, this scenario will profoundly influence the dynamics of capital flows, tariff policies, and even monetary strategies. 1) Should the momentum of AI innovation in the United States persist, the allure of American assets will remain compelling, ensuring a steady influx of capital that bolsters the US dollar. This would create a virtuous cycle of capital appreciation, reminiscent of the "Reagan’s Grand Cycle," where robust capital inflows under financial accounts strengthen the dollar's dominance, echoing the perspectives of the newly appointed US Treasury Secretary, Scott Kenneth Homer Bessent. 2) Conversely, should the US lose its edge in AI while China advances, the pace of capital inflows could decelerate, undermining the positive feedback loop driven by current capital movements. This shift would not only dampen US economic growth and equity markets but might also compel the US to seek alternative advantages through tariffs and strategic devaluation of the dollar, akin to the "Plaza Accord" era, where trade and investment drove capital flows and a weaker dollar offered competitive benefits, aligning with Robert Lighthizer's stance. Such developments would present significant challenges to global trade, inflation, and economic prospects.