US and Chinese tariffs set stage for broader challenges to global trade regime, market uncertainty

The tariffs announced on Friday by the US (Aaa stable) on $50 billion of Chinese goods and China’s (A1
stable) retaliation of tariffs on $50 billion of US goods will have a negative impact that is much broader
than implied by the negative effects on trade flows for the goods and sectors targeted by the tariffs. In
particular, amid rising tensions between the US and its other trading partners, these latest actions set the
stage for additional protectionist measures, raising the prospect of broader challenges to the global trade
regime. Moreover, chances for a lasting agreement between the US and China on trade and technology
transfers are more remote than earlier this year, when China reportedly agreed to buy $70 billion of
agricultural and energy products if the US dropped its pursuit of tariffs or other restrictions.

The US and China are the world’s two largest economies, accounting for a sizable share of global trade
investment and financial activity. According to data from the International Monetary Fund, the US accounts
for around 13.6% of global imports of goods and China for about 10.4%, the two largest country shares
globally. Therefore, and given the global integration of manufacturing supply chains and international links
between financial markets, the credit effect of the US and Chinese actions will reverberate across firms and
sectors in many countries.

Over the next several months, expectations of tit-for-tat tariffs will generate more volatility in global
financial markets. If trade policy uncertainty and financial market volatility also weaken consumer and
corporate sentiment, the second-order impact of tariff increases would be to dampen currently robust
global growth momentum.

Tariffs of $34 billion will be implemented immediately, with a further $16 billion considered for later
implementation. The tariffs on both sides apply to particular products within broad sector categories. More
than 1,100 items targeted by the US tariffs include technology related goods from sectors like robotics,
aviation, industrial machinery and autos. More than 650 items targeted by Chinese tariffs include goods
from agriculture, autos, aquatics, chemicals, medical equipment and energy.

Given the very large size of both economies (with 2017 GDP of $19.4 trillion for the US and $12.2 trillion for
China), tariffs on $50 billion in traded goods do not have a meaningful direct effect on growth in either
country. Nonetheless, firms that produce or use the products targeted by the tariffs will feel the effect. The
direct impact on exporters will depend on whether the goods are price-sensitive or not, and whether they
can find alternative markets for them. The impact on firms that use targeted products as inputs will depend
on whether the goods can be sourced from other suppliers. States and local regions that have a
concentration of sectors targeted by tariffs could also suffer.

The tariffs may raise the price of the targeted products in the importing country and depress prices
elsewhere, including in the exporting country. Whether they impact overall inflation will depend on the
conjuncture of several different factors. The tariffs may also lead to inefficient allocation of resources and
overproduction in some sectors.

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *