Republican presidential candidate Donald Trump has announced that he could 60% tariff on Chinese imports If he returns to the White House, a new analysis shows it would drastically slow down the world’s second-largest economy and bring it to the brink of deflation.
Taking into account the impact of Trump’s 2018 China tariffs, economists at UBS have created a simplified model of the impact of a new round, assuming China does not retaliate, other countries do not raise U.S. tariffs, and some trade shifts elsewhere.
They estimated that a 60 percent tariff would slow China’s GDP growth by 2.5 percentage points over the next 12 months. About half of this decline would be due to lower exports, the rest to indirect effects on consumption and investment.
Stimulus measures from Beijing to mitigate the impact of the tariffs would reduce the economic downturn to 1.5 percentage points, leading UBS to estimate that GDP growth could fall to around 3% in 2025 and 2026 if the hike is implemented in mid-2025. This is down from the bank’s baseline forecasts of 4.6% and 4.2%, respectively.
“Over time, potentially increased exports and production in other economies can help reduce the impact of higher U.S. tariffs, but there is also a risk that other countries will also raise their tariffs on imports from China,” UBS economists wrote in a note published on Monday. “In addition, the ongoing impact of weaker employment and investment spending will also weigh on the domestic economy.”
If China were to respond with appropriate countermeasures, the economic consequences would be even more severe, while less stringent tariffs would have less impact, the statement continues.
But the mere threat of such a tariff increase could harm China’s economy. Even if the tariff increase were reduced or avoided, “some damage to the economy would be unavoidable as producers and US importers move out of China to avoid the risk and uncertainty,” UBS warned.
China’s economy is already weakening, amid an ongoing real estate crisis, weak domestic demand, huge local government debt and the Biden administration’s expansion of trade restrictions.
In the second quarter GDP grew by 4.7%significantly below the previous quarter’s 5.3% and below the government’s 5% target. And a recent meeting of leading policy makers There was little sign that Beijing was about to take aggressive steps to stimulate the economy.
In China, demand is now so weak that consumer price inflation reached just 0.2 percent on an annual basis in June. At the same time, producer prices are already falling.
The UBS note said tariffs of 60% would increase deflationary pressures by weakening demand and increasing price competition. The result would be that domestic producer prices would continue to fall in 2025 and core inflation would be around 0%.
This means that overall consumer price inflation could remain at around 0.5% over the next few years – up to 1 percentage point below the Bank’s current baseline forecast.
Even before Trump’s improved election chances brought the prospect of new tariffs into focus, Views on China’s economy had already become gloomier.
“Years of erratic and irresponsible policies, excessive control by the Communist Party and broken promises of reform have left a Chinese economy in a dead end, with weak domestic consumer demand and slowing growth,” says Anne Stevenson-Yang, co-founder of J Capital Research and author of Wild ride: A brief history of the opening and closing of the Chinese economywrote in a New York Times comment in May.