BEIJING – A widening trade war between the United States and China during US President-elect Donald Trump’s second term could reduce the Asian nation’s economic growth by two percentage points and prompt Beijing to stimulate domestic demand, according to Macquarie Group.
Trump’s campaign promise to raise tariffs on Chinese goods to 60 percent could cause the country’s exports to decline by about 8 percent over the following year, Macquarie economists forecast in a Nov. 6 note.
Taking into account the impact on business capital expenditure and business confidence, the impact on gross domestic product would be significant, they said.
In that case, policymakers would need to boost policy support for the economy, and 60 percent tariffs could require three trillion yuan ($555.08 billion) in stimulus to compensate, the economists said.
Another three trillion yuan would be needed to reverse weak domestic demand, according to their estimates.
“Trade War 2.0 could end China’s ongoing growth model, where exports and manufacturing have been the main drivers of growth,” economists Larry Hu and Yuxiao Zhang wrote. “Under the next growth model, domestic demand, especially consumption, could become the main driver again as it was in the 2010s.”
The US economy would also suffer.
Bloomberg Economics projects that the maximum version of Trump’s campaign plan, with the China tariffs coming on top of 20 percent overall tariffs, would cut U.S. GDP by 0.8 percent and add 4.3 percent to inflation by 2028 if China retaliated alone.
If the rest of the world also retaliates, the hit to growth would be bigger, reducing US GDP by 1.3 percent, but adding only 0.5 percent to inflation due to the weakened US economy.
In the previous US-China trade war under the first Trump administration, the US raised the effective tariff rate on Chinese exports to 19.3 percent in early 2020 from 3.1 percent in early 2018.
About 66 percent of Chinese goods were subject to additional tariffs as a result, according to Sydney-based Macquarie.
Chinese exporters have since diversified their markets and shipped via third countries that then re-export to the US, helping China maintain a stable share of global exports, they wrote. If the US raises tariffs on the rest of the world, this strategy could prove more difficult, they say.
Trump’s campaign promises on trade could also be more of a threat and serve as leverage in negotiations with other countries, including China, after he takes office.
“In reality, the tariff increase may be smaller and narrower than what Trump has fled,” according to the report. “As a result, Beijing cannot react preemptively, but can determine the size of the stimulus later in response to the actual tariffs.”
A Politburo meeting in December could provide more clues about China’s strategy and potential response, they said.
Exports have played a more important role in boosting China’s economic growth since the pandemic, as demand for goods abroad surged and officials scrambled to ensure smooth production even during the Covid-19 lockdowns.
However, domestic demand declined as households and businesses became increasingly pessimistic during a sustained real estate downturn.
Layoffs and pay cuts in sectors from finance to tech also weighed on consumption. BLOOMBERG
