New US-China Tariffs A Further Risk To Global Growth

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Tuesday, August 06 2019  12:11PM / Fitch Ratings / Header Image Credit: Fitch Ratings

 

New U.S. tariffs on Chinese imports represent an escalation of U.S. trade protectionism beyond our baseline forecasts, Fitch Ratings says. As part of a broader trend that includes increased tariffs and greater trade policy uncertainty, the move highlights a significant threat to global growth. On their own, the tariffs may have a limited direct impact on near-term growth and policy responses could mitigate these effects.

U.S. President Donald Trump said on Thursday he would impose 10% tariffs on the remaining $300 billion of imports from China (the U.S. levied a 25% tariff on $200 billion out of around $540 billion of imports in May), beginning on September 1. The new tariffs broaden the goods being levied with additional tariffs and notably include consumer goods. His announcement followed the resumption of trade talks between the two countries this week, although these were inconclusive. China's commerce ministry said the country "will have to take necessary countermeasures" if the tariffs are imposed.

The announcement underscores how protectionism and the use of tariffs is raising the prospects for disruption to global trade that could have a much bigger economic effect than in 2018, as we noted in our Global Economic Outlook (GEO) - June 2019. The U.S.-China trade war, the U.S. Section 232 investigation into auto imports, the use of a U.S. tariff threat to pressure Mexico to change migration policies, and the rising chance of a no-deal Brexit are notable examples of areas of potential heightened trade risk.

 

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We did not factor further escalation in protectionism into our baseline GEO forecasts in June due to policy uncertainty but the effects of the uncertainty on business investment was reflected in our revision to our baseline global growth forecast for 2020 to 2.7% from 2.8%, despite better-than-expected activity data in the early part of 2019.

Furthermore, we conducted a scenario analysis in the June GEO indicating that the imposition by the U.S. of 25% tariffs on the remaining $300 billion of imports from China would reduce world economic output by 0.4pp in 2020.

The smaller size of the new U.S. tariffs compared with this scenario implies a smaller hit to growth. The effect that a 10% tariff may have on U.S. prices could be more easily mitigated than our scenario's 25% tariff through multiple channel, such as currency depreciation and passing on costs to other producers.

 

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A smaller tariff increase might also provoke a milder Chinese response than outlined in our June scenario. An alternative scenario could include China retaliating with additional tariffs of 20% on the $20 billion of U.S. imports unaffected by the trade war so far and raising the tariff rate on $100 billion of U.S. imports already subject to new tariffs to 25%, compared with 25% and 50%, respectively, in our June scenario. This updated scenario could also see the authorities allowing the Chinese Yuan to depreciate by 3% relative to our baseline, compared with 5%, and cutting rates by 25bps instead of 50bps.

In this milder scenario, the imposition of additional tariffs could prompt another 25bps rate cut by the Fed this year. This would help cushion the effects of the new tariffs and global growth would be just 0.1pp below our baseline in 2020.

Both scenarios involve stylized characterizations of policy responses and neither includes disruptions from export restrictions on specific companies. The updated scenario also does not factor in other developments since mid-June, such as broader-based monetary easing in major emerging markets, or the increase in the risk of a no-deal Brexit.

Nevertheless, they highlight the scope for protectionism to weigh on growth. Prospects for resolving the U.S.-China dispute remain uncertain, as China may at some point respond with non-tariff measures, for example, and further punitive tariffs are an adverse supply shock with damaging effects on certainty and business confidence that monetary easing may struggle to offset.

 

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