Despite the US’s harsh tariffs on China, the world’s second-largest economy should still manage to grow around 4% this year by lowering interest rates, expanding liquidity and also offering tax breaks to its exports, says Alicia Garcia Herrero, chief economist, Asia Pacific, Natixis Corporate & Investment Banking (CIB).
US President Donald Trump unveiled on April 2 an additional 34% tariff on all Chinese goods imported into the US, bringing duties on all Chinese imports to the US to over 54% when accounting for existing tariffs.
During the previous two rounds of US tariff hikes, China’s response was largely symbolic, says Herrero — “loud in rhetoric but restrained in action”. This time, however, Beijing raised import tariffs on all US goods directly to 70%.
“If implemented, this would be tantamount to trade decoupling, with huge consequences for global supply chains,” she adds in an April 8 note. “It seems important to analyse why China opted for a direct and comprehensive counterattack.”
The answer is twofold, says Herrero. “First, China was forced into a corner given the size and full coverage of US import tariffs. Secondly, China does have leverage, probably more than any other country in the world.”
Herrero expects China to react — not only by retaliating against the US, but also by easing monetary and fiscal policies to mitigate the negative impact on the economy.
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“In other words, notwithstanding the size of the shock, which is quite massive and possibly comparable to that of 2008 if these huge tariffs are maintained, China should manage to still grow around 4% by lowering interest rates, expanding liquidity and also offering tax breaks to its exports,” she adds.
Outside of China, Trump also seems determined to hit every economy in Asia, especially those with which the US has a large trade deficit.
Vietnam, for instance, faces a 46% tariff; while Cambodia is subject to a 49% rate. The focus on these two countries is not coincidental as they happen to assemble a large share of Chinese exports, especially Vietnam, says Herrero.
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“In that regard, these tariffs do not only threaten to undermine Asian countries’ competitiveness but it also makes it harder for China to bypass US tariffs on their products by using other locations for assembly and re-export,” she adds.
Herrero thinks the US is likely to extend the negotiation window longer, giving more time to coordinate with multiple countries.
“It simply isn’t realistic to reach a meaningful agreement across so many parties in just a few days and it is also clear that the US cannot keep such high tariffs with virtually every country in the world (with very few exemptions),” she adds.
