What if Trump-Xi summit in November fails?

China has more ways to retaliate than through import tariffs!

According to Bill Diviney, Senior Economist & Arjen van Dijkhuizen, Sr. Economist-ABNAmro Global Trade says, 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 imposed a 10% tariff on a further USD200bn from 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. 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. Meanwhile, confidence – both business and consumer – has been remarkably resilient in the face of new tariffs, both implemented and threatened.

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. 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, or renewed CNY deprecation, for instance.