- US President Trump is expected to announce around $US50 billion worth of tariffs on Chinese imports.
- According to UBS, a broad 10% tariff on Chinese exports would see a 0.3-0.4% decline in China’s GDP.
- China’s response is likely to be more measured and product-specific, given the country has more to lose from a trade war.
US-China trade tensions are escalating.
According to multiple reports, US President Trump is now scheduled to announce further import tariffs on Chinese goods as soon as Thursday (Thursday night Australian time).
The tariffs will apply to around $US50 billion of Chinese goods from industries spanning electronics to clothing. Restrictions on Chinese investment in the US will also be introduced.
It follows an investigation by the Office of the United States Trade Representative (USTR) into alleged instances of intellectual property theft by the Chinese government.
With that in mind, analysts from UBS have run some numbers on the potential impact for both countries stemming from another round of sanctions.
“In general, we estimate that a 10% tariff on all Chinese exports to the US will lead to a 2% drop in total Chinese export growth volume (and 10% drop in total exports to the US) as a first round impact, assuming the tariff is fully passed on to consumers,” UBS said.
“This would then result in a 0.3-0.4% decline in China’s real GDP growth rate.”
In saying that, UBS allowed for the fact that Chinese exporters may choose to absorb the tariffs and take a slight hit to company profits — which would reduce the drag on GDP.
If the sanctions do include Chinese electronic products, two sectors would be most affected: telecommunications (e.g mobile phones) and office machinery (computers).
This chart illustrates China’s dominant position as the chief exporter of computers and mobile phones to the US:
In response, UBS said it will be China’s aim to “avoid further escalating trade tensions, as the negative impact of a trade war on China would be bigger than on the US”.
The analysts said any Chinese response will be product-specific and more restrained.
That ties in with reports China intends to place restrictions on imports of US soybeans and sorghum grown by US farmers. The aim will be to target areas that voted for Trump in the 2016 election.
In addition, UBS doesn’t expect China to use either its currency exchange rate or US treasury holdings as tools to respond to US tariffs.
“Significant depreciation in the Renminbi (RMB) may undermine domestic households and corporates’ confidence in the currency, and revive capital outflow pressures,” the analysts said.
“We also do not see China selling (or threatening to sell) US treasuries to retaliate against US trade measures, given that it is the largest holder of US treasuries.”
If the US initiates a ban on Chinese investment, UBS said China could respond in kind with restrictions of its own.
Whereas China exports far more goods to the US than it buys, to some extent the opposite is true for foreign investment.
Based on 2016 data from the US Bureau of Economic Analysis (BEA), UBS said the value of China’s investments in the US amounted $US27 billion as of 2016. In contrast, the BEA said US foreign direct investment in China stood at $US92 billion.
The analysts added that the imposition of tariffs across a range of electronics goods is likely to only have a limited impact on the trade balances of both countries.
In the case of China, any reduction in US exports — led by consumer electronics — would likely be matched by a commensurate fall in imports for component parts, thus limiting the overall impact.
“For the US, a tariff on imports from China may just lead to higher prices or increased imports from other economies, unless US companies can quickly increase production to meet the demand,” UBS said.