China’s Economy at Risk: Impact of Trump’s 60% Tariff Hike

Introduction

Republican presidential nominee Donald Trump has threatened to impose a 60% tariff on Chinese imports if he returns to the White House. A new analysis by economists from UBS predicts that this move would have a drastic impact on China’s economy, potentially sending it to the brink of deflation.

The Analysis

The UBS economists used a simplified model to estimate the effects of a 60% tariff on China’s economy. They assumed that China wouldn’t retaliate, other countries wouldn’t match US duties, and some trade would be diverted elsewhere. According to their analysis, a 60% tariff would slow China’s GDP growth by 2.5 percentage points over the subsequent 12 months. This would be due to lower exports, as well as indirect impacts on consumption and investment.

Mitigating the Impact

The economists estimated that stimulus policies from Beijing to mitigate the impact of the tariffs would ease the economic drag to 1.5 percentage points. This would lead to GDP growth in 2025 and 2026 falling to around 3%, down from the bank’s baseline forecasts of 4.6% and 4.2%, respectively.

Risks and Uncertainties

The UBS economists warned that the economic impact would be harsher if China retaliates in kind. They also noted that the mere threat of such a tariff hike could still hurt China’s economy, even if the tariff hike is reduced or avoided. Producers and US importers may move away from China to avoid the risk and uncertainty, causing some damage to the economy.

China’s Economy: Already Slowing

China’s economy is already slowing due to an ongoing property crash, weak domestic demand, massive local-government debts, and the Biden administration’s expansion of trade restrictions. In the second quarter, GDP grew by 4.7%, down sharply from the prior quarter’s 5.3% pace and below the government’s 5% target.

Inflation and Deflation

The UBS note predicted that 60% tariffs would add further deflationary pressure by weakening demand and intensifying price competition. This would result in domestic producer prices staying in contraction in 2025 and core consumer inflation hovering around 0%. Overall consumer inflation could be stuck around 0.5% for the next couple of years, which is 1 percentage point lower than the bank’s current baseline forecast.

Conclusion

The potential impact of Trump’s 60% tariff hike on China’s economy is significant. The country’s economy is already slowing, and the tariff hike could push it to the brink of deflation. The UBS economists warn that the economic impact would be harsher if China retaliates, and even the mere threat of the tariff hike could cause damage to the economy.

FAQs

Q: What is the estimated impact of a 60% tariff on China’s GDP growth?
A: The UBS economists estimate that a 60% tariff would slow China’s GDP growth by 2.5 percentage points over the subsequent 12 months.

Q: How would China’s economy be affected if it retaliates against the tariff hike?
A: The UBS economists warn that the economic impact would be harsher if China retaliates in kind.

Q: What is the potential impact on consumer inflation?
A: The UBS note predicts that 60% tariffs would add further deflationary pressure, resulting in domestic producer prices staying in contraction in 2025 and core consumer inflation hovering around 0%. Overall consumer inflation could be stuck around 0.5% for the next couple of years.

Q: What is the current state of China’s economy?
A: China’s economy is already slowing due to an ongoing property crash, weak domestic demand, massive local-government debts, and the Biden administration’s expansion of trade restrictions.

Author: fortune.com

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