[SINGAPORE] With both the US and China not letting up in the battle of wills over tariffs, all eyes are on what China could do next.
US President Donald Trump announced in an abrupt about-turn on Wednesday (Apr 9) that he would delay the heavy tariffs he had previously imposed on around 60 “worst-offending” trade partners, but with one key exception – China.
In fact, Trump doubled down on his tariff pledge, increasing levies imposed on Chinese goods to 125 per cent. This marks the fourth round of tariffs that the US president has slapped on the world’s second-largest economy, having previously raised tariffs to 20 per cent, 54 per cent and 104 per cent.
So far, China’s willingness to retaliate against Trump’s slew of tariffs has not come as a surprise to observers.
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“China is the only country that has the capacity to actually retaliate quickly and swiftly,” said Dr Huang Chin-Hao, associate professor of political science at the National University of Singapore’s Lee Kuan Yew School of Public Policy. “They will want to send a message that they’re not going to capitulate under intense pressure from the US.”
Expect negotiations
But the impact that the tariffs will have on the Chinese economy is not lost on Beijing, Dr Huang highlighted, as the escalating trade war threatens to exacerbate deflationary pressures. Likewise, he expects American businesses and consumers to make their pains clear to the Trump administration.
“Realistically, we can expect the White House and Beijing to eventually sit down and negotiate, but Beijing wants to do that from a position of strength,” Dr Huang said. “There is a self-interest for both economies to negotiate and pay attention to complaints about unfair trade practices.”
Considering Trump’s decision to delay tariffs on other trading partners, he expects Trump to show similar pragmatic flexibilities towards China. “Beijing is hoping that cooler heads will prevail,” Dr Huang said.
Analysts remain mixed on the scale of the tariffs’ potential impact on China. Exports account for 18 per cent of the country’s gross domestic product, said T Rowe Price portfolio manager Zheng Wenli, with exports (including trade diversions and re-exports) to the US making up just 3 to 3.5 per cent of China’s GDP.
“Regardless, the uncertainty is likely to cause businesses and consumers to pause their purchasing activities,” Zheng said.
Stimulus ahead for China
Top Chinese policymakers are expected to hold discussions in response to Trump’s latest round of tariffs on Thursday, Bloomberg reported.
The meetings are likely to cover additional stimulus measures to boost China’s economy in the face of the tariffs, with a combination of fiscal and monetary measures expected, said Ray Sharma-Ong, head of multi-asset investment solutions for South-east Asia at abrdn.
“Monetary measures, such as (a) reserve requirement ratio cut, (an) interest rate cut, the People’s Bank of China restarting bond purchases and monetised stock market support, are likely,” Sharma-Ong noted.
Frances Cheung, FX and rates strategy economist at OCBC, said that policymakers are unlikely to further devalue the renminbi substantially, instead favouring a stable composure.
Further support measures for the stock market stabilisation fund as well as measures to boost consumption, such as childcare subsidies, are also expected, Sharma-Ong said. The Chinese government may also accelerate bond issuance, he noted.
Asean economic ministers attended an emergency meeting on Thursday to address the impact of US-China trade tensions on the bloc, while urging the two superpowers towards “constructive engagement and dialogue”.
Nevertheless, China’s trade tensions with the US may still result in a deepening of existing trade mechanisms with its other partners in Asia, Dr Huang noted. These include the Regional Comprehensive Economic Partnership and Asean-China Free Trade Area.
“These mechanisms will be revisited and strengthened to buffer potential uncertainties that may come out of the White House in the next three to four years,” Dr Huang said. “China would be keen to take a stronger role in ensuring that regional trading is more robust and resilient.”
