JAKARTA (TheInsiderStories) – United States (US) President Donald Trump’ decision to hike tariffs from 10 percent to 25 percent on US$200 billion of Chinese imported products will hit Chinese exporters hard, significantly impacting on their competitiveness against competing products produced in other countries, according to IHS Markit in its official statement today.
The tariffs will take effect for products leaving China starting today. Trump has said that he may also consider imposing additional tariffs on a further $235 billion of Chinese products. The Chinese government has said that they will also apply countermeasures to imports from the US.
“Such a large tariff hike will also result in significant transmission shocks for other Asian economies, due to the integrated Asian manufacturing supply chain providing raw materials and intermediate goods for China’s manufacturing sector,” says Rajiv Biswas, Asia Pacific chief economist at IHS Markit, today (05/10).
China may also be hit by any trade measures taken as a result of the US Department of Commerce investigation of imports of autos and auto parts under Section 232 of the US Trade Expansion Act of 1962, which could result in potential remedies in the form of increased US tariffs on imports of autos and auto parts from some nations, including China.
Although the sharp hike in US tariffs will hit China’s export sector hard, the Chinese economy is expected to remain resilient as the government has already rolled out additional fiscal and monetary policy stimulus measures in recent months to underpin growth, IHS estimated.
However, if the US decides to escalate the trade war further by applying tariffs of 25 percent to all Chinese exports as Trump has signaled, the negative shock to China’s export sector will be significantly amplified, posing a downside risk to China’s GDP growth outlook for 2019, according to IHS.
“In this scenario, the Chinese government would need to introduce significant additional fiscal and monetary policy stimulus measures in order to meet its GDP growth target of 6.0 percent to 6.5 percent for 2019,” Biswas noted.
The large negative shock to China’s export sector would also have ripple effects through Asia’s manufacturing supply chain, impacting on economies such as Japan and South Korea which provide intermediate goods such as electronics and chemicals products for China’s manufacturing sector, particularly since China accounts for a large share of their total exports.
The escalating US – China trade war adds to significant existing headwinds already facing the Asia-Pacific (APAC) region from a range of factors, including the sharp slowdown in global electronics new orders and weak new orders in the Eurozone manufacturing.
According to IHS, significant uncertainties and downside risks to the export outlook for the APAC region have contributed to the decisions by a number of APAC central banks to ease monetary policy settings so far this year.
The People’s Bank of China announced another cut in the reserve requirement ratio for small to medium-sized banks on May 6th, immediately after Trump’s announcement on May 5th that he would hike tariffs on Chinese imports.
The Reserve Bank of New Zealand, Bank Negara Malaysia, and the Philippines central bank, also announced rate cuts this week, with the weaker export outlook being among the factors cited in their rate cut decisions.
The Reserve Bank of India has also eased policy rates twice already in February and April, albeit driven mainly by moderate domestic inflationary pressures and concerns about overall growth momentum in the domestic economy. The weakening APAC trade outlook is likely to contribute to further policy easing by a number of APAC central banks in coming months.
Fiscal Stimulus Measures
Many APAC economies also have scope to use supplementary fiscal measures to boost economic growth to mitigate the impact of weak export growth.
The South Korean government introduced a $5.9 billion supplementary budget on 23rd April, with a key focus of the fiscal measures being to boost the weak export sector through programs such as boosting export credit financing.
However, an escalating US-China trade war would also reinforce trade diversion effects, as US buyers shift their orders to other manufacturing hubs, while manufacturers also restructure their output across global supply chains to reduce exposure to the US tariff measures.
ASEAN manufacturing hubs such as Vietnam, Malaysia, and Thailand are likely to benefit from some diversion of export orders as well as stronger foreign direct investment flows over the medium-term as multinationals diversify their global supply chains away from China.
Written by Lexy Nantu, Email: firstname.lastname@example.org