Trade war set to escalate

The US appears to be on the verge of expanding its tariffs to cover a total of $250bn of Chinese goods, the production of which generates 1.3% of China’s GDP. The proposed $200bn tariff list includes some consumer goods, though most have still been excluded. And the products targeted now include many for which China has a dominant market share. Indeed, China is the source of more than half of US imports of the products on the $200bn list, so alternative suppliers will be hard to find. If the tariff rate is set at only 10%, the impact will also be largely offset by the renminbi’s 6% fall against the dollar since the middle of June. As a result, the damage from the latest escalation of the trade conflict on China’s economy will be small – much less than 0.5% of GDP, even if policy is not loosened further, as we think it will be. (See the trade war section of our website for an archive of our analysis.)