China: Trade war drums beat louder again
The trade war between China and the United States worsened in recent weeks with both countries imposing new tariffs on one other in May and the U.S. threatening to slap tariffs on all remaining Chinese imports. This took analysts by surprise as both parties had reported progress in trade talks in recent months. While the direct impact on China’s GDP and inflation is expected to be limited, a further escalation in the trade conflict threatens the outlook. Significantly reduced chances of a prompt resolution to the trade spat, coupled with April’s weak economic data, signal that Chinese authorities could ramp up policy stimulus in the coming months to cushion the economy against a sharp slowdown.
On 10 May, the United States raised tariffs from 10% to 25% on USD 200 billion of Chinese imports. China retaliated three days later by increasing tariffs from between 5% and 10% to between 10% to 25% on USD 60 billion of U.S. imports effective 1 June. Despite the tariff hikes, analysts project that the impact will be relatively limited this time and that China should still meet its growth target for this year of between 6.0% and 6.5%. This viewpoint is supported by Tao Wang, chief China economist at UBS, who noted that, although the tariff increases “will lower China’s GDP growth by 30-40 bps in the following 12 months”, assuming “no further escalation and modest additional policy easing […] China’s 2019 GDP growth can reach 6.2%”.
The main risk to the Chinese economy is thus a further escalation of the trade war. On 13 May, the U.S. trade representative (USTR) began the formal review to impose up to an additional 25% tariff on all remaining Chinese imports (worth around USD 300 billion). While there is no a specific day when the new tariffs would be implemented, this could happen as early as late June or early July.
In this scenario, Tao Wang warns that:
“Imposing 25% additional tariffs on another $300 bn of Chinese exports to the US will likely subtract another 80-100bps from China’s growth, in addition to the projected 30-40bps negative impact from the current round of escalation. In the scenario of full-on trade war, the negative indirect multiplier effect on consumption and investment may be larger than our baseline scenario.”
In the same vein, Haibin Zhu, chief China economist and head of China equity strategy at J.P. Morgan, adds that:
“A full-fledged trade war without any countermeasures from China would reduce Chinese GDP growth by 0.3%-pt in 2019 and 0.5%-pt in 2020, assuming that the US enacts a new 25% tariff increase on all imports from China.”
Some analysts, however, are skeptical that U.S. threats of additional tariffs will ever materialize, given the impact it would have on President Trump’s support base. This is summarized by Brett House, VP & deputy chief economist at Scotiabank, who noted:
“The possible further 25% tariffs on the remaining third list of goods would cause much more obvious and immediate pain for average American households—including the White House’s political base—than the three rounds of tariffs imposed in 2018. A 25% increase in the prices of smart phones, tablets, and computers heading into the 2020 vote has never struck us as a winning electoral strategy.”
Therefore, there is a chance that the scheduled meeting between Presidents Trump and Xi Jinping at the 28–29 June G20 summit could yield some results and avert, for now, a full-fledged trade war.