US tariffs on China imports will weaken global economy

Chinese officials described the Trump administration's posturing on trade as the product of an "anxiety disorder".

KUALA LUMPUR: US President Donald Trump's threat to impose 25% tariffs on the remaining US$325bil of Chinese goods imported into the US will weaken the global economy, Moody’s Analytics says.

Its chief Asia Pacific economist Steve Cochrane said no Asian country will be left unscathed; in fact, no country will escape the impact as global growth and global commodity prices come under pressure.

Trump had on Sunday raised the possibility that tariffs would be raised on Friday from 10% to 25% on US$200bil in Chinese imports. 

Cochrane said this was the same threat that was made prior to his Dec 1 summit with President Xi Jinping of China. 

“But Trump also upped the ante by saying he would impose 25% tariffs on the remaining US$325bil of Chinese goods imported into the US.

Of course, these all remain threats and may be nothing more than part of the process of negotiation. But Moody’s Analytics has already modeled the impact of this worst-case scenario,” he said. 

This scenario was based on the assumption that all goods imported by the US from China faced a 25% tariff, and that China responded in kind with tariffs on all US imports to China. 

Moody’s Analytics also assumed that there are increased administrative and procedure roadblocks to US trade in order to level the impacts given that China imports much less from the US than does the US bring in from China.

Cochrane said originally,  Moody’s Analytics' subjective probability on this scenario was 10%, which was further reduced to 5% after the Dec 1 postponement of any new tariffs.

In this worst-case scenario, the real GDP growth in the US is reduced by 1.8 percentage points at its nadir one year into the scenario. 

The unemployment rate rises to well over 5%. The rest of the global economy suffers, although a stronger U.S. dollar moderates the blow somewhat, easing the hit to China. 

In the scenario, equity markets suffer, as indeed Asian markets on Monday and US futures markets on Sunday have already faltered. 

“The model predicts that GDP growth in Asia slows by nearly 1 percentage point, and in China growth slows by 1.2 percentage points, putting growth near 5% one year into the scenario. Other Asian nations also slow, although by about 0.3 percentage point. 

“No Asian country is unscathed; in fact, no country escapes the impact as global growth and global commodity prices come under pressure,” it said.
 
Cooler heads

However, Cochrane said it still seems likely that this scenario will not come to pass, that cooler heads will prevail. 

Without this trade war scenario, it already appears likely that the US and Chinese economies will slow in the coming year. 

The US will face friction from an extremely tight labour market. China will not be able to implement fiscal and monetary stimulus indefinitely. 

Therefore, it is in the interests of both sides to bring the trade negotiations to a close and focus on policies appropriate for economic stability.

“Even if an agreement is reached, do Trump’s tactics imply that his desire for tariffs will extend, say, to auto imports from Europe, Japan and Korea? 

“Our assumption is no, but Sunday’s announcement of a possible imposition of tariffs on all imports from China would be a game changer if fully implemented,” he said.