Cryptocurrency Investors and the Trade Crisis
Cryptocurrency investors are striving to comprehend the unfolding events during one of history’s largest trade crises. The sensitivity to macroeconomic developments has surged following the transformation of cryptocurrency into something larger. Over the past three years, the repercussions of everything from PMI data to central bank meeting minutes have been observed on charts. Today, we find ourselves amidst a much larger phenomenon.
The U.S. Trade Imbalance
The U.S. import figures, which were around $2 trillion in the 2000s, have now surpassed $4 trillion. Since 1995, trade imbalance has skyrocketed, resulting in a substantial trade deficit against $3 trillion in exports. This imbalance is at the heart of the tariffs announced against all countries. Trump stated that the U.S. economy has been exploited for years due to unfair tax policies, and this nightmare will end with more equitable tax rates.
Canada and Mexico are exempt from mutual tariff regimes, yet they continue to face a 25% tariff on a significant portion of their exports to the U.S. The trade balance with China stands at -$295.4 billion, while it’s -$235.6 billion for the European Union and $171.8 billion for Mexico. The primary contributors to this trade deficit include machinery and automobile imports, with electronics being the largest category from China. Since automobile imports significantly contribute to the trade imbalance with Canada, Trump is announcing special tariffs on vehicles.
A trade deficit indicates that a country is importing more valuable goods than it is exporting to that country. Despite the U.S. excelling in exporting services such as banking, insurance, consulting, and legal advice, there has been a shift towards many goods, including electronics and clothing. This shift negatively impacted domestic production and employment, further fueling the trade deficit.
With recent actions, Trump has declared a halt to all of this. However, this also marks the end of the globalization narrative. Under these circumstances, it won’t be easy for businesses and factories to return to the U.S. For countries wishing to return to their former glory, Trump urges them to move production back to the U.S.
What Lies Ahead for Cryptocurrencies?
China is now facing an additional tax burden of 54%. In some categories, this tax rate rises to 65-70%. As this article was being prepared, Fitch downgraded China’s long-term foreign currency issuer default rating from ‘a+’ to ‘a’.
“We expect China’s general government deficit to rise from 6.5% of GDP in 2024 to 8.4% in 2025. The downgrade reflects our expectations of continued weakening in China’s public finances and rapid growth of public debt. We project China’s GDP growth to decrease from 5.0% in 2024 to 4.4% in 2025.” – Fitch
In response, China has stated that this rating decision is biased. They also announced they would continue with a moderately loose monetary policy.
Returning to the question of what happens next, if China, the EU, and others accelerate easing to limit tariff impacts, liquidity will increase, likely boosting cryptocurrencies. However, recent ECB minutes indicated that interest rates may not remain tight. As mentioned, China appears to be continuing with easing measures.
It is clear that retaliatory measures will yield no results. Therefore, the EU, China, and other partners must consider relocating production to the U.S. or eliminating tariffs. Both options are difficult and complex for economies. With recent announcements, we are experiencing a significant rupture in the global economy for the first time since World War II. In the coming days or weeks, as countries clarify their reactions to tariffs, we will better understand where we are heading. Currently, while uncertainty remains for cryptocurrencies, a notable trend of risk aversion on a global scale suggests potential for stagnant or negative movements ahead.
