City skyline in China

China Special August 2019

China: New tariffs to hit certain Chinese exports from 1 September, but some delayed until December

While initially threatening to slap a 10% tariff on the remaining USD 300 billion of imports from China, U.S. President Donald Trump partially backed down in mid-August by postponing imposing tariffs on a list of consumer goods from 1 September to 15 December. This comes after the People’s Bank of China adjusted the official midpoint reference for the yuan below the 7-yuan-per-dollar mark for the first time since the financial crisis on 8 August.

The 1 September tariff round will go ahead for some goods, such as agricultural, clothing and antiques; however, the levy on a range of consumer goods was postponed until mid-December. The threat to impose tariffs on all remaining imports followed President Trump’s dissatisfaction with the quantity of American agricultural goods that China was buying and the lack of progress in trade negotiations. While postponing tariffs on consumer goods should prove beneficial to both countries, this by no means signifies the end of the trade war is in sight. The research team at Goldman Sachs, for example, stated that they “no longer expect a trade deal before the 2020 [U.S. presidential] election”, while Iris Pang, greater China economist at ING, added that “it won’t have escaped Chinese authorities’ attention that a full-blown trade war is unlikely to help President Trump’s chances in the election.”

Furthermore, China could retaliate with its own tariffs, which would pour further fuel on the conflict. Nevertheless, the research team at Danske Bank does not expect a marked escalation, stating that it “would do more damage to the US economy. However, we cannot rule out China starting to restrict exports of rare earth metals in retaliation if the US does not lift the import ban on Huawei.” China could also resort to other measures. For example, the government ordered state-owned enterprises (SOEs) to halt purchases of U.S. agricultural products, which, the research team at Danske Bank pointed out, is “Trump’s big headache in the trade war” as it inflicts pain upon a crucial bloc of voters in swing states.

China could also continue to adjust its foreign exchange rate, weakening the yuan to offset some of the tariff effects, which caught analysts off-guard. Pang mentioned that ING “didn’t think China’s authorities would allow USD/CNY to pass the 7.0 handle because of the disruption such a move would cause in asset markets, not just in China but around the world”, summarizing that “a currency war would not be helpful to China’s economy”. Nevertheless, Pang did concede that “Chinese leaders appear to have concluded that the currency can be used as a tool to provoke Trump and inflict political damage.”

In summary, it is unlikely that the currency will depreciate much further given the Central Bank noted that stability is a priority and the authorities will want to avoid destabilizing capital outflows. Simultaneously, as economic growth is slowing, too much depreciation would drag on growth even more, suggesting further fiscal stimulus could be on the cards. For example, in a recent Article IV visit the IMF noted that, “if trade tensions escalate further, additional stimulus, mainly fiscal, would be warranted and should be targeted.”

Free sample report

Access essential information in the shortest time possible. FocusEconomics provide hundreds of consensus forecast reports from the most reputable economic research authorities in the world.
Close Left Media Arrows Left Media Circles Right Media Arrows Right Media Circles Arrow Quote Wave Address Email Telephone Man in front of screen with line chart Document with bar chart and magnifying glass Application window with bar chart Target with arrow Line Chart Stopwatch Globe with arrows Document with bar chart in front of screen Bar chart with magnifying glass and dollar sign Lightbulb Document with bookmark Laptop with download icon Calendar Icon Nav Menu Arrow Arrow Right Long Icon Arrow Right Icon Chevron Right Icon Chevron Left Icon Briefcase Icon Linkedin In Icon Full Linkedin Icon Filter Facebook Linkedin Twitter Pinterest