After more than three years of strict Covid epidemic control, China’s real estate market collapse and consumer confidence weakening, exports remain one of China’s few remaining economic engines. Former US President Trump has just won the 2024 presidential election and will return to the White House in January next year. He has vowed to impose tariffs of 60% or more on goods from China, accusing Beijing of unfair trade practices that have led to significant trade deficits for the United States.
Looking back at the US-China trade war in 2018, both sides escalated tensions by imposing retaliatory tariffs, ultimately leading to a standoff where Beijing backed down. However, the current situation is even more different.
An article in The Wall Street Journal stated that “Beijing’s potential countermeasures are relatively limited this time, especially given the risk of excessive devaluation of the Chinese yuan.” The yuan has depreciated by around 10% against the US dollar from early 2018 to the end of 2019, offsetting about two-thirds of the impact of US tariffs, according to Morgan Stanley’s estimates.
In order to offset a tariff increase of 60%, the yuan would need a larger depreciation, especially since the yuan is currently 3% lower against the US dollar compared to the end of 2019. If the Chinese Communist Party (CCP) attempts to mitigate the trade impact through devaluation, it will further intensify capital flight.
According to The Wall Street Journal, in the past year up to the end of June, an estimated $254 billion in “illicit” funds flowed out of China, surpassing the severity of capital flight seen in 2015. The significant capital outflows from China also indicate a lack of confidence in the country’s economic development among individuals with resources and the ability to move money out of the country.
The majority of economists expect Trump to ultimately set tariff rates in a milder range of 20% to 22%, but if he follows through on imposing higher tariffs, the Chinese economy will face significant repercussions. Goldman Sachs’ chief economist for Asia Pacific, Andrew Tilton, mentioned in a report to clients on Thursday (November 7) that Trump took two years in his first presidential term to impose tariffs on Chinese imports, but the second term could see tariffs implemented as early as the first half of next year.
According to Goldman Sachs’ estimates, the 2018 trade war caused China’s Gross Domestic Product (GDP) to decrease by 0.65 percentage points. Imposing a 60% tariff could lead to a 2-percentage point decline in China’s economic growth, not accounting for the impact of diverting goods to third countries to evade tariffs.
Tariffs serve as Trump’s tool to force opponents back to the negotiation table. Former Treasury Secretary Steven Mnuchin, who served during Trump’s first term, told CNBC, “I do think tariffs were necessary to get people back to the negotiating table, especially China. They didn’t live up to all the agreements they made.” China pledged to purchase an additional $200 billion in US goods by the end of 2021, but according to the Peterson Institute for International Economics (PIIE), China only imported goods equivalent to 58% of the promised amount.