According to Wall Street Journal, the US government is set to impose a 10% tariff on another $200bn of Chinese exports this month, this is equivalent to 40% of China exports to the US or 9% of China’s total exports in 2017, and four times larger than the tariffs already placed on the $50bn goods previously. The level of trade war between the “big two” is obviously increasing, but what alarming investors more is that US President Trump doubled down his bet on the table by an additional of $267bn as China’s trade surplus with the US rose to a record high in August. The risk of a larger magnitude of trade war is increasing and it could also be sooner than most people think.
Meanwhile, the trade war so far has limited impact on US consumers as among the $50bn of goods being tariffed now, only around $3.7bn are consumer products. Also, the US government tentatively avoided to impose tariffs on goods with high China import share. However, the impact to US consumer could be much greater for now as there are $78bn consumer products on the upcoming $200bn list, which may include consumer goods such as furniture ($24bn), air conditioners ($1.3bn), vacuum cleaners ($1.8bn), travel bags ($2.2bn), chairs ($1.4bn) and lamps ($2bn) etc. China import shares are above 20% for most of these products, and for about half of them China’s shares are even more than 50%, meaning that it will be much harder for US to find substitutes from other countries. As a result, US consumer will bear a bigger bill for this new coming tariff, despite it is still uncertain how much of this tariff shock will be passed to US retail prices, and how the US consumer will react to price hikes.
Figure 1. More consumer products in coming Tariff
Source: Deutsche Bank
Despite the 10% tariff rate is lower than the 25% rate proposed before, situation may become even worse if the remaining $267bn of goods from China are to be included in the tariff list, as around 80% of these are consumer products, which includes big items such as cell phones ($43bn), personal computers ($37bn) and toys ($12bn). The purchasing power of US consumer will suffer in particular for the lower-income group as China accounts for around 70% of total imports of the world for these consumer products. Therefore, the $267bn “all-in tariff” could significantly derail the growth of US economy on higher inflation and lower consumer confidence, while this will also hit hard for China exporters and possibly the related supply chain for neighbouring countries in Asia. The “no-win” situation may weaken global GDP growth by 0.4% per Citi forecast, but could surprise negatively if it spreads to more countries.
Figure 2. Finding substitute will not be easy in coming tariffs
Source: Deutsche Bank
The outlook of the trade war becomes more uncertain and it is not easy to reach out an agreement before US November midterm election as China may also want to observe and wait for more pressure from US consumer to the White House to compromise. Nevertheless, if an agreement is reached, we can expect China will agree to buy more products from US, such as Agriculture and Energy products to reduce the trade surplus, and open more service market to the US firms. Besides, we can expect RMB may appreciate back to pre-war level of around 6.5, but at the same time China may reduce its infrastructure investment and is negative for the commodities. In contrast, if an agreement is not reached and more tariff is imposed, we can expect China will further loosen its monetary policy and RMB may devaluate to above 7.1. Lowering VAT and other taxes may also other options for the Chinese government.