Global Daily – The macro impact of the US-China trade war

by: Bill Diviney , Arjen van Dijkhuizen

Global Trade: Tariffs to push up inflation, but growth impact less certain – Emboldened by the strong momentum in the US economy and probably keen to score points among his base ahead of the midterm elections, President Trump is pressing ahead with his threat of further tariffs on Chinese imports. In addition to the 25% tariff on USD50bn of imports, the US is now set to impose a 10% tariff on a further USD200bn on 24 September, with this rate going up to 25% on 1 January. The staggered implementation will a) soften the economic blow to businesses and consumers, and b) leave room to negotiate (and potentially avoid implementation) ahead of the expected Trump-Xi summit at the end of November. China has in the meantime promised to retaliate with a 5-10% tariff on a further USD60bn of US imports (there is already a 25% tariff on USD50bn of imports), which could ultimately lead to the US imposing a tariff on all c.USD500bn of Chinese imports.

With this ratcheting up in the trade war, we now see upside risks to our 2019 core inflation forecast in the US, which could be pushed higher by up to 30bp, assuming full implementation and pass-through of tariffs (Global Daily 2 August – What a 25% tariff would mean for US inflation). However, the growth impact is far from clear. The biggest concern around the President’s trade policy has always been over the confidence effects rather than the direct macro impact, which is relatively small. Indeed, the total USD110bn of US exports to China that would be affected represents 6.6% of 2017 total US exports, and 0.7% of GDP (and it is not as though these exports would stop, but rather the demand for them perhaps would be dampened). Meanwhile, confidence – both business and consumer – has been remarkably resilient in the face of new tariffs, both implemented and threatened. This could change, but we are inclined to think at this stage that consumers and businesses would weather new tariffs. While somewhat higher core inflation would reduce consumers’ real purchasing power at the margin, 30bp higher inflation is unlikely to be enough to seriously derail consumer spending (for evidence of this, one need only look at how strong consumption has been this year in the face of significantly higher energy prices). There is plenty of room for consumers to dip into savings or to take on more debt to make up any shortfall, while wage growth is picking up somewhat more quickly than we had expected.

For China, we expect the impact of these new tariffs on GDP growth for this year to be moderate, also reflecting the fact that Beijing is offsetting the downside risks from the trade conflict by stepping up fiscal stimulus and tweaking its financial deleveraging campaign (China Watch: The 200bn dollar question answered for more background). Moreover, an import tariff of 10% is not yet really ‘prohibitive’ in our view. In fact, looking at recent macro data, we also see some upside risks to our 6.5% growth forecast for 2018. For next year, the impact may become more material should US-China negotiations fail to bring a truce on the trade front and the US would indeed proceed with higher rates and/or expanded the scope to all imports from China. Note that, if need be, China has more ways to retaliate than through import tariffs; think of administrative measures (nontariff barriers), or renewed CNY deprecation, for instance. (Bill Diviney and Arjen van Dijkhuizen)