China: Trump's tariff hammer to hit Chinese growth, stocks and CNY lower

What a ‘Liberation Day’. Trump’s tariff announcement was clearly harsher than expected and not least China felt the heat. Below I try to answer five key questions but obviously a lot of uncertainty has emerged and more questions than answers are flying in the air.

How high will tariffs on China go?

There is some confusion over this. Before the announcement yesterday, Chinese tariffs were above 30% coming from the 20% increase related to Fentanyl in the past two months and the more than 10% tariff in place before Donald Trump took over as US President again. The reciprocal rate announced yesterday is described as “an additional ad valorem duty” so comes on top of existing rates. With the reciprocal rate for China set at 34% it lifts the rate to above 64%. On top of this a removal of the so-called ‘de minimis’ exemption for tariffs on packages below USD800 will add further to this rate. So, China could be facing 65-70% US tariffs on average. A lot of different numbers are floating around as it is not totally clear how much of the different tariffs are on top of each other. So, you may see numbers from anything between 54% and above 70%.

How will this affect the economic outlook for China?

Regardless of what the true average rate becomes, there is little doubt it will be a quite big blow to China’s economy in the short term coming from different channels:

• First, exports will obviously take a hit. The tariffs work as a sharp fiscal tightening in the US, which will hit consumption growth and investments. When it comes to Chinese competitiveness, it is a mitigating factor that other low-cost countries in Asia are also hit with high tariffs (Vietnam for example 49%). But that also means that their economies will be hurt and thus their imports from China weaken. The rest of the world, such as Europe, will likely also see weaker growth and imports.

• Second, investments are likely to be affected as exporters are set to put some investments on hold due to weaker demand expectations. The sheer rise in uncertainty will add to this. There is a risk of even further escalation when China retaliates and although US and China may eventually make a deal, it could take a long time.

• Third, private consumption growth could see a new set-back due to more uncertainty over unemployment and weaker sentiment potentially spilling into housing.

Download The Full Research China