Trade war escalation will hit China harder than the US, IMF says

China’s GDP size will be 1.6 per cent lower in 2019 than it otherwise would be, if the US slaps tariffs on all Chinese imports, International Monetary Fund forecasts

PUBLISHED : Tuesday, 09 October, 2018, 11:13am
UPDATED : Monday, 15 October, 2018, 11:50am

A further escalation of the trade war between the US and China would take a major toll on economic growth in both countries next year, with China the bigger casualty, according to an economic analysis released by the International Monetary Fund on Tuesday.

The world economy would also suffer, the IMF said. Based on the trade tariffs already in place, the organisation revised down its estimates of world growth this year and next by 0.2 of a percentage point to a still healthy 3.7 per cent.

Assuming the US slaps tariffs on all Chinese imports, as US President Donald Trump has threatened to do, the effect on consumer and business confidence combined with the negative financial market reaction would probably cut the GDP of the United States by more than 0.9 per cent in 2019, while Chinese economic output would be 1.6 per cent lower than it otherwise would be, the IMF said.

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The institution warned that such economic modelling is inherently imprecise and the effect of a full-blown trade war could be less or even more severe than this calculation.

A full-blown trade war assumes that the US will impose tariffs on a further US$267 billion of Chinese goods – covering nearly all its Chinese imports. It also assumes that the US will impose tariffs on all of its automotive imports, a worst-case scenario that would affect many countries.

The US has imposed a 25 per cent tariff on US$50 billion worth of Chinese imports, and in September added a 10 per cent tariff on an additional US$200 billion of Chinese products, with the tariff rate set to rise to 25 per cent on January 1 if China does not make trade concessions.

How US tariffs are expected to weigh on China’s growth rate

China retaliated with a 25 per cent tariff on US$50 billion of US imports and variable tariffs of 5 per cent to 10 per cent on a further US$60 billion of US imports.

Higher tariffs and rising trade barriers will weigh heavily on the global economy, apart from the US and China, especially through its impact on confidence and financial conditions. According to model simulations, a full-blown trade war would cause the global economy to slow by more than 0.8 per cent in 2020, with growth remaining roughly 0.4 per cent lower in the long term, compared with a baseline without trade tensions.

In its current forecasts, which assume no new trade protection measures, the IMF has cut its growth expectation for 2019 by 0.2 of a percentage point for both the US and China from its previous forecast in July, mainly due to the negative effect of the recent tariff actions.

The IMF now expects growth in the US to peak at 2.9 per cent in 2018 but soften to 2.5 per cent in 2019 because of the recently introduced trade measures, dropping further to 1.8 per cent in 2020 as the country’s tax-cut stimulus begins to take effect.

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The IMF expects China’s growth to moderate from 6.9 per cent in 2017 to 6.6 per cent in 2018 and 6.2 per cent in 2019, reflecting slowing external demand growth and necessary financial regulatory tightening.

Over the medium term, Chinese growth is expected to gradually slow to 5.6 per cent as the economy continues to make the transition to a more sustainable growth path with continued financial de-risking and environmental controls.