Donald Trumps suggestion of a 45% tariff on Chinese imports to the U.S. would lead to an 87% decline in them, and over time due to multiplier effects, such a decline would translate into a 4.8% GDP loss, report analysts at Daiwa Capital Markets. Kevil Lai and Olivia Xia point out in their August 18 research piece titled “What would a Trump presidency mean for China?” that Trump thinks the playing field between China and the U.S. is not even.

Also see China’s Debt Bonfire is a Disaster in the Making

U.S. tariff would impact China’s exports, GDP and FDI

During his Republican debate, Trump bemoaned how foreign countries were taking advantage of the US.

 

china ghost town photo
Photo by Omar Omar

Drawing reference to Donald Trump’s stance on China, wherein he suggested a 45% tariff on Chinese goods as a main tool to narrow the U.S.-China trade deficit and restore American jobs, the Daiwa analysts point out that tariffs would increase import prices. Lai and Xia believe that depending on various substitution factors, the U.S. would most likely import less from China. The analysts argue that China would suffer more than the U.S. because of its higher exposure to exports and FDI.

China's exports to US China, Chinese GDP, TPP

Highlighting their analysis on the topic, the Daiwa analysts point out that other things being equal, a 45% tariff would lead to an 87% decline in Chinese imports for the U.S. The analysts believe that over time thanks to multiplier effects, such a decline would translate into a 4.8% GDP loss. They argue that even if tariffs are watered down to 15%, the loss of GDP for China would still be 1.8% excluding FDI repatriation.

Impact on China's exports

The Daiwa analysts highlight that Trump believes the U.S. has lost millions of jobs to China due to an artificially undervalued CNY. Trump believes the CNY is 15-40% undervalued and such, undervaluation has offered Chinese exporters a huge advantage while imposing the equivalent of a heavy tariff on U.S. imports for China. Lai and Xia at Daiwa argue that for the past 20 years, China has adopted a quasi-fixed-exchange-rate regime, with which the USD is the main anchor. The analysts point out that for this purpose, the PBoC has been actively “intervening” in the foreign exchange market by printing extra CNY to purchase USD from the market. The analysts believe that without these purchases, the CNY would have been much stronger, easily by 15-40%.

TPP dumping could benefit China

Touching upon Trump’s promise to withdraw from Obama’s Trans-Pacific Partnership, the Daiwa analysts point out that the TPP is considered an exclusive deal to prevent China from benefiting from new tariff reductions and preferential market access with TPP members. The analysts argue that an eventual inclusion of China could get China to double down on its market reforms and aim for higher quality trade agreements.

ValueWalk highlighted the US International Trade Commission’s assessment over the likely effects of the TPP on the US economy as a whole and on specific industry sectors.

Expressing concern about a second-round impact on China’s balance of payments due to FDI repatriation, the Daiwa analysts point out that the proposed tariffs would have a significant impact on China’s exports to the U.S. They add that if these tariffs are in place for a long time and lead to a significant substitution effects, one could expect the significant relocation of export-manufacturing capacity from China to the U.S. or other countries.

Potential tariff impact

The Daiwa analysts believe China would suffer more than the U.S. from the tariffs being imposed because of China’s higher exposure to exports to the U.S. and to FDI flows. The analysts underscore that such an impact would be profound and pervasive, hitting not only the export sector but also the domestic domains through the multiplier effect.