In his likely second term, former President Donald Trump is expected to use tariffs not as a long-term protectionist strategy, but as a negotiating tool to broker a major deal with China.

Contrary to the popular belief that escalating trade wars are Trump’s primary goal, strategists believe his goal is to reorient US-China trade relations and thereby attract significant Chinese direct investment (FDI) into the US.

Historically, tariffs have been a popular tool in Trump’s economic policy calculations to pressure trading partners into negotiations.

However, strategists at BCA Research believe that Trump’s tariff strategy in his second term will be fundamentally different from that of his first.

“Former President Trump intends to impose tariffs in his second term, but with the goal of striking a major deal with China. Such a deal would, surprisingly, involve getting Beijing to increase foreign direct investment in the United States,” analysts at BCA Research said in a note.

Trump’s recent speeches, including his address to the Republican National Convention, suggest a shift in his approach. In his speech to the 2024 convention, he mentioned tariffs only twice, a stark contrast to his previous rhetoric.

Importantly, these mentions came in the context of China’s forced relocation from Mexico to the United States, suggesting that tariffs are now being used as a tool to force China to invest directly in the American economy, rather than simply penalizing Chinese imports.

Trump’s strategy is the concept of a “grand deal” with China. Such a deal would likely mean that China agrees to increase its investment in the US, especially in sectors that create jobs and strengthen American manufacturing. This is reminiscent of successful trade negotiations from the 1980s, when economic concessions were exchanged for favorable terms.

Analysts argue that China’s current economic strategy is consistent with Trump’s goals. Faced with increasing economic risks and the need to diversify its investments, China may be more inclined to negotiate a deal that benefits both countries.

The increase in Chinese direct investment in Mexico as part of the risk-minimization strategy shows Beijing’s willingness to move capital abroad. Trump’s strategy aims to redirect these investments to the US by offering China favorable trade terms in return.

For investors, Trump’s tariff strategy presents both risks and opportunities. The initial rhetoric of new trade tensions could trigger market volatility, which could particularly affect small-cap stocks and the US dollar. However, analysts advise investors to remain cautious and not make hasty decisions based on early trade war fears. Trump’s strategy is believed to ultimately lead to a resolution rather than a protracted conflict.

Investors are being advised to ignore the hysteria surrounding Trump’s tariff threats and instead focus on the long-term consequences of a possible agreement with China.

If successful, such an agreement could stabilize trade relations between the United States and China, attract significant foreign investment, and strengthen sectors such as manufacturing and technology in the United States.