Donald Trump's tariffs could push allies to turn to China and India, according a former U.S. diplomat, and there's evidence that's already happening.
Wendy Cutler, a former acting deputy U.S. trade representative, told CNBC’s “Squawk Box Asia” that disruptions and higher costs associated with Trump's tariffs have forced the European Union to look elsewhere to meet its needs.
“It’s making overtures to other countries, and if our partners can’t rely on us, guess what?" Cutler said. "These other countries, including China, look more attractive.”
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Reuters reported that Hong Kong's benchmark Hang Seng Index, which lists many Chinese companies, is up 17 percent since Inauguration Day, compared to a 9-percent drop in the S&P 500, which has lost $4 trillion in market value from record highs last month.
“The reality is, in the broadest sense of the word, Europe has to look for alternative markets to the U.S. China can help,” David Roche, strategist at Quantum Strategy, told CNBC earlier this month.
The EU concluded a major deal with the so-called Mercosur countries – the Spanish abbreviation for the Southern Common Market, a regional trade bloc comprised of Argentina, Bolivia, Brazil, Paraguay and Uruguay – in December, in part, due to fears of protectionist policies exemplified by Trump's tariff threats.
“One thing I’ve learned at the negotiating table, you do need to have respect and trust if you’re going to reach a deal,” Cutler said. “If someone’s at the table and they really feel that they’ve been unfairly treated, it’s hard to get them to move, to do what you want them to do."
Investors have reacted negatively to Trump's volatile economic policies, including his on-again, off-again tariffs against Canada, China and Mexico, and the president hasn't ruled out the possibility of recession, while China has been rolling out stimulus and other measures to boost its economy and markets.
"China is now the adult in the room," said Dong Chen, chief Asia strategist at Pictet Wealth Management.
Morgan Stanley showed that foreign-based funds had $3.8 billion in Chinese equities, following three straight months of withdrawals, and some investors noted the irony of equity markets rallying in Europe and China – two of Trump's targets for punishing tariffs.
"The pressure that the Trump administration is putting on foreign governments," said Ross Mayfield, a U.S.-based investment strategist at Baird, "has actually, in a lot of cases, resulted in outperformance from those countries."