Macro & Investment Insights

China: Quantifying the impact of trade war

  • 16 August 2018
  • 7min read

Key points:

  • China’s rapid advancement in technology and innovation has created a structural conflict with the current leader, the US.
  • The trade dispute is merely a disguise of this structural conflict, making it much harder to resolve than those between traditional US allies, including the European Union, Canada and Mexico.
  • With the situation still fluid, we outline three scenarios of how the trade war may evolve and consider their impacts on the Chinese economy.
  • Our results show that the first-round impacts on China’s exports are manageable, worth 0.1%, 0.5% and 0.8% of GDP in each of the three scenarios.
  • The second-round impacts are more complex, uncertain and potentially more damaging. We estimate that the subsequent shocks to domestic investment and employment, disruptions to the global supply-chain and tighter financial conditions could amount to an additional 0.1%, 0.4% and 0.7% of GDP.
  • Against mounting downside risks, Beijing has started to adjust domestic policy to safeguard the economy. However, it has refrained from using renminbi (RMB) devaluation to fight the trade war, as this would run the risk of reigniting capital outflows and provoking more hostility from the US.

Trade war: What is the end-game?

The dramatic escalation of Sino-US trade tension has come as a major shock to global financial markets. From initial tariffs targeting solar panels, washing machines, steel and aluminium, to a more broad-based tax on $50bn of technology products1, the Trump administration has significantly ramped up its protectionist measures against China over the past six months. With ongoing threats of more tariffs to come, fears of an all-out trade war have weighed on Chinese markets and clouded the economic outlook.

  • These tariffs were implemented after the breakdown of a few rounds of Sino-US negotiation, where the US refused to accept a number of concessions Beijing offered to close the trade gap – including buying more US products, opening its market and strengthening the protection of intellectual property.

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