Republican presidential candidate Donald Trump has said he may impose a 60 percent tariff on Chinese imports if he returns to the White House. A brand new evaluation predicts this may drastically slow growth on the earth’s second-largest economy and push it to the brink of deflation.
Taking into consideration the impact of Trump’s 2018 China tariffs, economists at UBS have created a simplified model of the impact of a brand new round, assuming China doesn’t retaliate, other countries don’t raise U.S. tariffs, and a few trade shifts elsewhere.
They estimated that a 60 percent tariff would slow China’s GDP growth by 2.5 percentage points over the subsequent 12 months. About half of this decline can be as a consequence of lower exports, the remaining to indirect effects on consumption and investment.
Stimulus measures from Beijing to mitigate the impact of the tariffs would cut back the economic downturn to 1.5 percentage points, leading UBS to estimate that GDP growth could fall to around 3% in 2025 and 2026 if the hike is implemented in mid-2025. This is down from the bank’s baseline forecasts of 4.6% and 4.2%, respectively.
“Over time, potentially increased exports and production in other economies can help reduce the impact of higher U.S. tariffs, but there is also a risk that other countries will also raise their tariffs on imports from China,” UBS economists wrote in a note published on Monday. “In addition, the ongoing impact of weaker employment and investment spending will also weigh on the domestic economy.”
If China were to reply with appropriate countermeasures, the economic consequences can be much more severe, while less stringent tariffs would have less impact, the statement continues.
But the mere threat of such a tariff increase could harm China’s economy. Even if the tariff increase were reduced or avoided, “some damage to the economy would be unavoidable as producers and US importers move out of China to avoid the risk and uncertainty,” UBS warned.
China’s economy is already weakening, amid an ongoing real estate crisis, weak domestic demand, huge local government debt and the Biden administration’s expansion of trade restrictions.
In the second quarter, GDP grew by 4.7 percent, well below the previous quarter’s 5.3 percent and the federal government’s goal of 5 percent. And a recent meeting of top politicians showed little sign that Beijing will take aggressive steps to stimulate the economy.
In China, demand is now so weak that consumer price inflation reached just 0.2 percent on an annual basis in June. At the identical time, producer prices are already falling.
The UBS note said tariffs of 60% would increase deflationary pressures by weakening demand and increasing price battle. The result can be that domestic producer prices would proceed to fall in 2025 and core inflation can be around 0%.
This implies that overall consumer price inflation could remain at around 0.5% over the subsequent few years – as much as 1 percentage point below the Bank’s current baseline forecast.
Even before Trump’s improved election probabilities raised the prospect of latest tariffs, the assessment of the Chinese economy was deteriorating.
“Years of erratic and irresponsible policies, excessive control by the Communist Party and broken promises of reform have left a Chinese economy in a dead end, with weak domestic consumer demand and slowing growth,” says Anne Stevenson-Yang, co-founder of J Capital Research and creator of Wild ride: A transient history of the opening and shutting of the Chinese economywrote in a New York Times op-ed in May.
