US hikes tariffs as trade policy outlook worsens

Key points

  • The US enacted an increase in tariffs on $200bn of Chinese exports today at 12.01 (EST).
  • The tariff increase reflected a deterioration in negotiations. However, Chinese Vice Premier Liu He remains in Washington to continue to negotiate a broader deal today and President Trump suggested he may speak directly with Premier Xi.
  • The outlook for trade policy is highly uncertain from here. Ongoing negotiations provide hope of reaching a settlement that would render the recent trade increases temporary. However, with both sides discussing retaliation and further escalation, such optimism could fade quickly.
  • US financial market reaction has been muted so far. Increased tariffs risk lowering US GDP growth by 0.25-0.5ppt over the coming two years. Such an effect could be offset by easier Federal Reserve policy. Nevertheless, permanent tariff increases pose a further threat of material deceleration in the US economy, which already faces internal headwinds.
  • Chinese financial market reaction has been sharper. Current tariffs threaten reducing Chinese GDP growth by around 0.3ppt. Associated policy easing would likely see China able to maintain 2019 GDP growth above 6%. However, broader tariff increases could reduce growth by up to 1.5ppt and would not be broadly offset with even significant policy easing.

US announces tariff increases

The US increased tariffs on $200bn of Chinese goods (affecting approximately 5,700 product ranges) to 25% from 10% on Friday at 12.01am (EST) – a move forewarned by President Donald Trump on Sunday. The tariffs will not take effect immediately, applying only to goods shipped after 10 May. The increase in tariffs reflects a relatively swift reversal of trade negotiations that have been underway for several months and had been largely described as making “progress”. The reversal appears to have been precipitated by China attempting to redraft areas of previously agreed text in the trade agreement draft, specifically focusing on imbedding new trade pact agreements in Chinese Law. Meanwhile in a letter sent from Chinese Premier Xi Jinping to President Trump, President Xi discussed “equality”, suggesting that China believed the trade deal was increasingly unbalanced in its benefits.

 

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