What is the potential impact on China from a potential 60% tariff? Citi discusses Investing.com
Investing.com — In a note to clients on Wednesday, Citi economists discussed the potential impact of a 60% tariff on Chinese goods entering the U.S. market, a move that has gained attention following predictions of a Donald Trump presidential victory.
The report points out that such a tariff would lead to a sharp drop in China’s exports to the US which could reduce China’s GDP growth by around 2.4 percentage points in the worst case scenario.
However, Citi believes the 60% global tax is more likely a negotiating ploy than an imminent policy change.
“The proposal for a 60% global tariff seems more likely to be a bargaining chip than a real risk, in our view,” said economists led by Xiangrong Yu in the paper.
They expect a realistic scenario where the effective tax rate could rise by an additional 15%, which would have a small impact on China’s GDP, down 0.5 to 1.5 percent depending on trade outcomes.
The company is also considering possible responses to China’s high tariffs. Citi suggests that Chinese policymakers are unlikely to respond to pre-election propaganda but could allow the (RMB) to fall to between 7.7 and 8.0 if the 60% tariff is implemented.
Initially, the People’s Bank of China (PBoC) may defend the currency to manage market expectations and trade imbalances. In addition, Citi expects China to continue to focus on technological development rather than using counter-cyclical methods.
Regarding the ongoing meeting of the National People’s Congress Standing Committee (NPCSC), Citi does not believe that it will be greatly influenced by the outcome of the US election.
The agenda of the meeting is mainly focused on China’s financial support in 2024 and strategies to resolve risks, driven by domestic concerns such as growth targets, declining property markets, inflation, and weak consumption.
While external uncertainty may prompt more domestic support, a quick policy response to the US election seems unlikely for Citi.
“The CEWC (Central Economic Work Conference) in mid-December would be a better place to assess the impact on the US election,” said strategists.
Citi expects that the NPCSC will focus on solving risks rather than stimulating demand. The committee has discussed a new round of debt restructuring and may provide more details later.
Although the Ministry of Finance (MoF) has recycled an unused local government bond (LGB) allocation of RMB 400 billion, Citi does not expect a significant revision of the headline deficit to the headline 3% of GDP.
Looking ahead, the Wall Street firm suggests it’s too early to rule out the possibility of a major boost by 2025. They maintain a fiscal deficit of around 3.8% of GDP by 2025, regardless of the tax situation.
However, in the event of a 60% tax, fiscal stimulus “could be much higher and more focused on demand for necessities such as consumption and goods, in our view,” the strategists said.
“The RMB10 trillion stimulus sponsored by top policy advisers such as Liu Shijin will be transparent and may be available in the face of trade conditions,” they added.
