“We expect the Chinese government to continue to maintain a supportive policy stance.”
US President Trump pre-announced a further expansion of the US tariffs on imports from China: the remaining half of imports not yet taxed will be at a rate of 10%. It was our central scenario that the tariff net would be increased before the 2020 elections, but we are surprised by the timing, so close on the heels of the G20 meeting in Osaka.
Such tariffs further reduce the possibility of an encompassing trade deal with China before the US elections. Yet at the same time, they do not seem to signal a breakdown in trade talks (which would then lead to our alternative scenario).
From a Federal Reserve rate perspective, we do not exclude that these tariffs are also a way (admittedly convoluted) of putting more pressure on Chairman Powell to ease policy more than was signalled at the 31 July Fed press conference. For now we still expect one additional Fed rate cut of 25 basis points (bps) in September, but the risk is mounting of a third rate cut before the end of the year.
It is also possible Trump saw a ‘window of opportunity’ to increase tariffs now as elections, while coming, are still a year away with the calculus that growth will hold up well and the impact on confidence will dissipate ahead of the elections. It also comes as the Democrats, especially on the left, implicitly ramp up pressure not to compromise with China.
Goods targeted by the new tariffs are mostly consumer goods (including popular phones, tablets and laptops); we still see a minimal direct impact on US consumption and therefore GDP growth. The biggest risk is the indirect impact, and whether business confidence becomes even more affected at a time of a global growth slowdown.
Our alternative negative scenario (which we still see at a relatively high 35% probability), implying more downside risk to US growth and much more Fed easing, would be if Trump escalated the 10% tariff to 25%, or if Trump went after Europe, including Europe-made cars.
Meanwhile, while we believe the Chinese government still has firm intentions to reach a deal with the US, the latest tariff move is not likely to prompt China to make any quick concessions. And it is almost certain that China will retaliate.
We estimate that the existing 25% tariffs on USD250 billion worth of Chinese exports could reduce Chinese GDP growth by about half a percentage point on an annualised basis. The additional tariff of 10% on about USD300billion of Chinese goods could shave another 0.2% off Chinese annual growth.
In response to the latest escalation in trade tensions, we expect the Chinese government to continue to maintain a supportive policy stance to mitigate the downside risk but to refrain from conducting massive stimulus.