Trade war: how will Donald Trump’s tariffs on US$200 billion of goods affect China’s GDP?

The US’ latest announcement of tariffs on US$200 billion worth of Chinese products may knock about half a percentage point off China’s growth rate, according to officials and economists.

That figure may be manageable, but the real challenge for Beijing in an escalating trade battle with the US is that China’s manufacturing base, which helped to underpin the country’s economic boom in the past four decades, may start be harmed, they said.

Liu Shijin, the former vice-president at China’s Development Research Centre – a think-tank under the State Council, China’s cabinet – and an economic policy adviser to China’s leaders, said China finds it easier to manage “direct economic impact” from the trade war than to shore up market confidence.

“The direct impact from the trade war is not that significant; the significance is its impact on sentiment and expectations,” Liu told the World Economic Forum in the northeastern Chinese city of Tianjin on Tuesday.

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His comments came after US President Donald Trump announced that the US will apply a 10 per cent tariff, rising to 25 er cent on January 1, on US$200 billion of Chinese products from next Monday, significantly widening the scope of the trade war.

Trump also threatened that if China retaliated this time, the US would “immediately pursue phase three”, imposing tariffs on a further US$267 billion worth of products, which would cover almost all Chinese exports to the US.

China’s Ministry of Commerce said in a statement that Beijing is being forced to hit back to “safeguard its own interests and the world’s free trade order”.

Hostility from Washington is now one of the biggest risks to the US$12 trillion Chinese economy at a time when its growth had already been losing steam. China’s GDP growth slowed to 6.7 per cent in the second quarter of this year, down from 6.8 per cent.

Ding Shuang, chief China economist with Standard Chartered Bank in Hong Kong, said that – together with previous US tariffs on US$50 billion of Chinese goods – a 10 per cent US tariff on US$200 billion of Chinese imports would drag down China’s growth by 0.4 percentage points, increasing to a 0.6 drop if the tariffs are increased to 25 per cent.

“China will use expansionary fiscal policy ... to bolster domestic demand and offset pressures from the trade war,” Ding said.

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Lillian Li, a vice-president of credit strategy at Moody’s Investors Service, the ratings agency, wrote in a note that Trump’s latest move marked “a major escalation in trade tensions” and may hit China’s GDP growth by 0.3 to 0.5 percentage points over the next year.

While Beijing can cope with this by using domestic fiscal and policy easing to maintain a decent growth rate of 6.6 per cent in 2018 and 6.4 per cent in 2019, the spillover effect from the trade war will be amplified as companies facing higher costs “will gradually diversify or shift supply away from China”, Li wrote.

A research note by Guotai Junan Securities, a Chinese brokerage, made a similar conclusion, predicting the US tariffs to date, covering US$250 billion of Chinese products in total, may knock 0.55 percentage points from China’s GDP growth.

In the trade war’s previous exchanges, China and the US imposed 25 per cent tariffs on US$50 billion worth of each other’s products.

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Sheng Liugang, an economics professor at the Chinese University of Hong Kong, estimated that the 10 per cent tariffs on US$200 billion of Chinese goods would lose China US$22 billion in exports – a number that is not significant for now.

However, the new tariff is the start of an expansion of the trade war that may eventually take a dear toll on China’s economy, and China must “prepare for the worst”, Sheng said.

Trade between China and the US has looked robust so far. In August, China exported US$44.4 billion worth of goods to the US, a rise of 13.2 per cent from August 2017, contributing 20.4 per cent of total Chinese overseas shipments last month, according to the latest Chinese customs data.

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Meanwhile, China imported US$13.3 billion of products from the US in August, a rise of 2.3 per cent from the same month last year, giving China a record-high trade surplus with the US of US$31.1 billion.

Lou Jiwei, a former Chinese finance minister and now chairman of the National Council for Social Security Fund, said in a speech at the China Development Forum over the weekend that China does not need to panic about the trade war, because the trade will inflict pain on US enterprises as well.

“Even if the US wants to set up an alternative supply chain in a third country, that takes time,” Lou said. “Can the US really withstand the pain for three or even five years?”

Additional reporting by Sidney Leng