Robert Gilhooly, Senior Emerging Markets Economist at abrdn, comments on China’s response to US tariffs and what might follow;
“China’s retaliatory measures go into effect on 10 February, leaving a window of opportunity for the US and China to strike a deal.
China’s targeted actions – unlike the blanket 10% US tariffs – should also reduce the risk of a spiralling trade war, while the focus by the US administration on fentanyl offers a route for de-escalation.
China could restrict exports of the raw materials used for fentanyl production, particularly for exports to South America. This could go some way to appease the US.
And even if the latest additional 10% tariff is rolled back, China is likely to face alternative tariffs. Existing 301 legislation offers a route to move tariffs on Chinese products higher, even if the International Emergency Economic Powers Act (IEEPA) faces legal challenge or forceful steps are taken with respect to fentanyl, for example.
The timeline for US trade actions remains very unclear. We expect that the average bilateral tariff rate facing Chinese goods will likely settle around 35-40%, up from the roughly 15% faced at the end of Biden’s term in office, and higher than the 25% implied by the latest 2 February tariffs.
Tariffs should spur a more forceful easing by the Chinese authorities, limiting the hit to growth. But it will be difficult to fully offset the shock and we estimate that GDP will likely be depressed by 1% even if the authorities loosen monetary and fiscal policy, and condone an FX depreciation.
In the last trade war, the RMB moved almost 1-for-1 with the change in the average bilateral tariff rate, so even a partial adjustment could easily push to the USD-CNY rate to 8 or beyond, providing another reason for global investors to stay on the sidelines.
While policy easing should limit the near-term drag and stop GDP growth falling below 4.5% this year, the long-run negative effects will be harder to avoid. Trade uncertainty will likely depress foreign direct investment further – which was already in a tenuous position, as indicated by the latest American Chamber of Commerce in China survey.
And the trade war could add to long-run damage via its interaction with China’s existing structural challenges and policy priorities; if the trade-war reinforces the desire to achieve a greater degree of self-sufficiency and direct investment to high-tech sectors, the authorities may fail to fire the domestic engine of consumption, potentially further amplifying trade tensions.”