New research from UBS Group AG indicates that imposing a 60% tariff on all Chinese exports to the U.S. would significantly impact China’s economy, potentially more than halving its annual growth rate. If former President Donald Trump, who has considered such a tariff, returns to the White House, China’s GDP could be reduced by 2.5 percentage points in the year following the tariff implementation. Currently, Beijing aims for about 5% growth this year after achieving a 5.2% expansion in 2023. The forecast assumes some trade will be diverted through third countries, that China will not retaliate and that no other nations will impose similar tariffs. The expected economic drag would be split between a decrease in exports and a reduction in consumption and investment.
Exports have been a significant growth driver for China this year, contributing 14% to the economy’s expansion and pushing the trade surplus to a record high last month. However, this export strength has led to complaints from trade partners, prompting more countries to impose or consider tariffs to counterbalance China’s trade practices. Over time, increasing exports through and production in other economies might mitigate the impact of higher U.S. tariffs, but there is also the risk of other countries raising tariffs on Chinese imports.
Chinese retaliation could worsen the situation by increasing import costs. Even the risk and uncertainty of another trade war could deter U.S. importers, regardless of any future tariff reductions. UBS forecasts China will grow by 4.6% next year and 4.2% in 2026, but this could drop to 3% for both years, even with stimulus measures. To counteract the effects of high tariffs, the Chinese government may use fiscal measures, ease monetary policy, issue special treasury bonds, and allow the currency to depreciate by 5% to 10%.
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