The US tariff hike of 25% on Chinese products worth $50bn will affect a sizable portion of China’s exports to the US, but from the perspective of the whole economy, the impact should be limited, according to analysts at Nomura.
Key Quotes
“China Customs’ statistics show that China’s exports to the US totaled $433bn in 2017, suggesting around 12% of the exports would be affected. However, when compared with China’s total exports ($2.26trn) and nominal GDP ($12.25trn) in 2017, the increased tariffs ($50bn*25% = $12.5bn) would equate to only 0.6% of total exports and 0.1% of GDP.”
“Moreover, the pinch will not only be felt by China. As the assembly and processing center of Asia’s sophisticated supply chain, products made in China contain a large portion of value-added that comes from the rest of the region. Thus, US trade curbs against China will very likely spill over to other Asian economies.”
“Impact on pipeline inflation from China’s retaliation
China’s imports from the US were $155bn in 2017, so the tariff hike of 25% on roughly $50bn in goods means approximately 32% of imports from the US will be affected. The direct impact of the increased tariff could be higher prices of US imports in China. If we assume all the tariff hikes are passed through to consumers, it implies prices of US goods in China rise by around 8%. Given US imports accounts for nearly 8% of China’s total imports, this suggests overall import price inflation of 0.6% after the additional hike of import tariffs.
China’s import price inflation has a closer correlation with its PPI inflation than CPI inflation. A simple regression of historical data implies that a 1pp change in import prices inflation would correspond to a 0.4pp increase in PPI inflation, and a smaller 0.1pp change in CPI inflation. Thus, the 0.6% increase in import price inflation could lead to a 0.2pp increase in PPI inflation and a 0.1pp increase in CPI inflation. Overall, the inflationary impact seems to be minor.”
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