While many companies could take a substantial hit if the U.S. and China impose tariffs on all of their bilateral trade, the macroeconomic consequences globally would be “surprisingly small,” Capital Economics said in a note last week.
Media reports over the weekend have said the Trump administration was set to impose a 10 percent tariff on US$200 billion of Chinese imports in days. Combined with the tariffs already imposed on US$50 billion of Chinese imports, that would apply penalties to around half of all the U.S. goods imports from China. The mainland was set to swiftly retaliate.
Trump has also threatened to impose tariffs on all imports from China.
“It may seem counter-intuitive that a trade conflict between the world’s two largest trading economies would have only a small impact on the global economy. But while China and the U.S. account for a combined 22 percent of world exports, bilateral trade between them accounts for just 3.2 percent,” Capital Economics said in a note published before the weekend developments.
Even then, trade volumes probably wouldn’t fall very much, it said.
“The elasticity of demand for most Chinese exports is quite low, and many U.S. exports to China could be redirected. Also, the U.S. tariffs have been partly offset by a 9 percent fall in the renminbi against the dollar from its peak earlier this year,” it said.
Additionally, it noted that tariffs don’t necessarily reduce aggregate demand, and are likely to only redirect some trade from China and the U.S. to other countries.
It also noted that China and the U.S. have “fairly closed” economies, with China’s export of goods and services at 19.7 percent of gross domestic product last year, down from 36.0 percent in 2006, while the U.S.’s exports were only 11.9 percent of GDP.
Even at 25 percent, tariffs on all of China’s exports to the U.S. would only boost inflation by 0.5 percentage point for around a year, Capital Economics estimated.
“Protectionism would need to spread well beyond China and the U.S. in order to deliver a significant hit to global GDP,” it said.