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Macroscope | Retaliate, reform, liberalise: the three ways China will respond to new US tariffs
Aidan Yao says it is only natural that Beijing would strike back should Washington impose its next round of threatened tariffs, but it can also be expected to proceed with domestic reforms and a further opening of its market to outside investors, which may ultimately be to its benefit
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The US administration’s proposed tariffs on US$200 billion in Chinese exports have taken Sino-US trade tensions to a new high.
The 10 per cent blanket tariffs will cover an extensive range of Chinese products. The collective economic effects of the US$200 billion, plus the previous US$50 billion, are likely to be worth 0.3-0.4 percentage points of China’s gross domestic product growth.
However, the subsequent hit to exporting companies, plus the reverberation from the financial market correction, could amplify the second-order shock. The news elicited a sharp reaction in markets, with both Chinese equities and the yuan tumbling.
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Though the tariffs are not yet a done deal, Beijing is expected to alter macro policies in three ways.
First, once the final list of tariffs is determined, Beijing is likely to fire back. China has a smaller universe of goods it buys from the United States (US$130 billion last year) but can match the value of tariffs by imposing a higher tax rate than 10 per cent. This would create a reciprocal shock for the US economy.
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