By Chang Shu (Economist), David Qu (Economist) and Eric Zhu (Economist)
04/02/2025 23:45:03 [BI]
Summary by Bloomberg AI
- The US’s new tariff on Chinese goods could rise to over 60%, which would be hugely damaging and could cut China’s direct exports to the US by up to 80% over the medium term.
- China is likely to respond by boosting fiscal and monetary policy support to shield its economy from the blow to external demand, and may also explore ways to strengthen economic ties with other countries.
- Markets reacted negatively to the US move, with China’s 10-year treasury bond yield dropping and the Shanghai-Shenzhen 300 Index trading down, while the yuan weakened against the dollar.
(Bloomberg Economics) — OUR TAKE: US President Donald Trump’s “Liberation Day” tariff on China looks close to — or worse — than our worst-case scenario and stands to crush exports and dent growth at a time the recovery is already looking fragile. There’s a lot of uncertainty in our model estimates — and whether the new tariff will go ahead as planned — but we calculate the average charge on Chinese goods could rise to more than 60%, a level Trump threatened during his election campaign but was widely considered improbable.
The tariffs, if implemented, will hurt China on multiple fronts, by weakening demand for China’s products in the US and hitting the world economy. What’s more, the US action risks stronger retaliation from other trading partners — further depressing global demand.
- The US said China’s goods will face a tariff of 54% with the latest 34% reciprocal levy announced Wednesday in Washington, effective April 9.
- That appears to tally the 20% extra levy Trump slapped on China this year plus the latest tariff — but apparently not the duties that were already in place before Trump started his second term.
- If we consider those, the average US charge on Chinese goods will rise to 66.8% from 32.8%, according to our estimates.
- The higher average tariff rate – 54% or 66.8% — would be hugely damaging. Bloomberg Economics’ trade team’s earlier estimates suggest that 60% tariffs could cut China’s direct exports to the US by up to 80% over the medium term, putting 2.3% of GDP at risk.
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Tariffs: US Vs China
Source: Comtrade, US Census Bureau, UNCTAD TRAINS, World Bank, Bloomberg Economics
China vowed to take countermeasures to protect its interests and called for talks to deal with disputes. Beijing’s responses to US tariffs so far this year have been measured and targeted, probably to avoid escalation. Our base case is that Beijing will refrain from a proportionate response this time around as well — though its patience could be stretched. Either way, it will probably boost fiscal and monetary policy support to the shield the economy from the blow to external demand.
The government has lined up a big budget this year, with a substantial increase in the deficit. The focus now will be to deliver the fiscal stimulus quickly. The People’s Bank of China has signaled it will ease policy. We had expected that sometime in the second quarter. Now, we think the PBOC will lower the reserve requirement ratio for banks in April and cut rates in May — and deliver more easing over the course of the year.
Direct and Indirect Impacts
Taking into account the removal of de minimis tariff exemptions on US imports, the actual hit is even higher.
- The current rule allowing packages worth up to $800 to enter the US duty-free will end on May 2.
- Our trade team estimates the value of such US-bound shipments from China at $33.5 billion in 2023, equivalent to 8% of US imports from China.
- The end of the exemption will raise the average US tariff on Chinese goods by another 2.4 percentage points to 69.2%.
Indirect effects of the US tariffs on other trading partners will compound the pressure from the direct impact of the higher levies on Chinese goods.
- A slowdown in global growth, and combined with uncertainties over US policy, stand to damp demand for Chinese goods. The US’s universal reciprocal tariff also reduces possibilities of rerouting exports.
- Net exports contribute just 2% to China’s GDP. Still, a sharp drop in external demand would hurt a large swathe of Chinese companies — and an increase in unemployment could further depress domestic spending.
China’s Response
The massive step-up in US tariffs on Chinese goods, despite Beijing’s restrained responses to the two 10-ppt bumps in February and March, will test its patience and risks triggering a stronger and wider retaliatory measures.
- Beyond the verbal protests Thursday morning, China could opt to take its time before responding with concrete steps. The Trump team built in a delay for reciprocal tariffs — an initial 10% duty bump would go into effect April 5, and the remaining hike on April 9.
- Raising tariffs on imports of US goods could be counterproductive from the perspective of supporting the economic recovery — one reason to believe any retaliatory measures won’t be proportional to the US move.
- Another consideration is that antagonizing Washington at this point would reduce the chances of trade talks where it could make its case for leniency. Striking a deal with the US would not be easy, though, given the litany of US complaints.
- Keeping a low profile could also be important now, with other countries signaling readiness to negotiate with Washington. Pushing back too hard would risk a fiercer response.
Broader Strategy
China will likely step up support for domestic demand and strengthen trade ties with other countries.
- China’s 2025 budget calls for a broad fiscal deficit of 8.0% of GDP, up significantly from 6.6% in 2024. Policymakers have also signaled readiness to do more to cushion growth from external shocks. Speedy government bond issuance in the first two months of the year suggests they are rolling out fiscal stimulus at faster pace than in 2024, possibly freeing up space for extra boosts.
- We expect the PBOC to reduce banks’ RRR by 25 basis points to 9.25% in April and trim the seven-day reverse repo rate by 10 bps to 1.4% in May. That would get it started on delivering the 100 bps of reductions in the RRR and 30 bps of rate cuts we see coming this year.
- The US’s sweeping tariffs on its trading partners will likely drive China and others to explore ways to strengthen economic ties, possibly through lower tariffs, reductions in nontariff barriers, and joint manufacturing ventures.
Market Response
Markets reacted negatively to the US move.
- China’s 10-year treasury bond yield dropped 6 bps to 1.73% as of writing, suggesting investors were pricing in stronger headwinds to growth and further PBOC easing.
China Treasury Bond Yield and CSI 300 Stock Index
Source: Bloomberg
- Stock prices were volatile. The Shanghai-Shenzhen 300 Index rebounded in the first trading hour after opening down, then retreated to trade down 0.5% as of writing.
- The PBOC pushed against downward pressure on the yuan, setting a stronger-than-expected fixing. Major banks were also said to be buying the yuan, an indirect way officials influence the exchange rate.
- Even so, the Chinese currency yuan weakened to 7.30 per dollar from Wednesday’s close of 7.27. That about 1.5% weaker than the fixing rate – among the closest to the ceiling of the 2% trading band allowed by the PBOC since end-January.
Yuan Moved Toward End of Trading Band Against Dollar
Source: CFETS, Bloomberg, Bloomberg Economics