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

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.

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.

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.