After a reportedly tense meeting in the Oval Office with advisers and trade representatives on Thursday (South China Morning Post (SCMP)), Trump tweeted that ‘during the [trade] talks’ with China, starting on 1 September, the US will be imposing a ‘small’ additional tariff of 10% on the remaining $300bn of Chinese imports into the US that have not yet received one.
There is arguably some room for the tariff increase to be delayed or cancelled. However, at this stage it makes sense to assume that it will go ahead and we cannot rule out a future additional layer of tariffs.
What are the implications?
- It makes a US Federal Reserve (Fed) rate cut in September probable (rather than anything later) and increases the probability of another cut soon afterwards.
- It will hurt US consumers and damage importer profits. Consumer goods constitute a much greater proportion (over 50%) of the imports in this round than in previous ones and the tariff would be timed in the run-up to Christmas when consumers are most likely to buy such goods.
- Even if the tariff is cancelled, the very fact that President Trump would announce tariffs when talks had only just restarted likely increases business uncertainty and erodes trust between the US and China.
- It is plausible that China might retaliate with further tariffs.
How much of an impact will the tariffs have?
While it is not the feared ‘full’ escalation of threatened tariffs (i.e. additional 25% tariffs on the $300bn, plus 25% autos tariffs), it is a step in that direction. Analysts predict that the 10% tariffs could knock between 0.2% and 0.5% off Chinese GDP over the next 12 months, and 0.1% to 0.2% off US GDP by year-end.
Were there to be ‘full’ escalation, International Monetary Fund (IMF) analysis from last year suggests that the potential impact on global GDP could be as much as 0.7%, taking into account all the increases so far, with much of the impact coming from financial conditions and business uncertainty. As for the US, analyst estimates are wide, ranging from around 0.2% to more than 1% of GDP. For more, see 'Trade versus Stimulus' Investment Clock Economic Update.
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