New US/China tariffs raise risk of lower growth: S&P

HONG KONG – With China retaliating against the U.S. announcement of tariffs on $200 billion of Chinese imports - by imposing 5% to 10% tariffs on U.S. imports valued at $60 billion effective September 24 – ratings agency Standard and Poors is predicting what it calls “the shock arising from this escalation by both sides” to eventually have a larger proportionate impact on the U.S. economy than on China's.

U.S. tariffs imposed or to be imposed on Chinese imports now total US$250 billion, which represents about 50% of the US$505 billion value of China's annual exports to the U.S., S&P says.
 
Chinese tariffs imposed or to be imposed on U.S. imports now total US$110 billion, representing about 85% of the US$130 billion value of U.S. annual exports to China.
 
“In the event of a trade war that sees the escalation of the current U.S.-China trade dispute to one where 25% tariffs are imposed on all nonfuel goods between the two largest economies, with a shock to confidence added in,
roughly 1.2% cumulatively could be shaved off U.S. GDP over 2019-2021,” S&P says.
 
“For China, the loss to GDP would be around 1%.
 
“At this stage, the GDP impact could be a fraction of that described because the percentage of Chinese imports into the U.S. subject to current and potential tariffs amounts to about half the US$505 billion of 2017 import value, and the current percentage of U.S. imports into the China subject to current and potential tariffs amounts to about 85% the total value of US$130 billion.
 
“Even if such a trade war doesn't materialise, the mere perception of the heightened risk of one could be sufficient to depress business and market confidence to an extent that it has a significant impact on the real economy.
 
“While it is difficult to ascertain the magnitude of such a shock, we think it would likely exceed the effects of trade fundamentals alone, at least on the global level.”
 
S&P says the aggregate impact of both tariff and confidence effects would be more pronounced in the U.S. than in China, partly because Americans' household wealth is more exposed to equity markets -- and, thus declining share prices -- so that consumption would slow more.
 
“Moreover, household consumption constitutes a much higher share of GDP in the U.S. than in China (69% versus 39% last year).
 
“In addition, as a result of the much larger share of state-controlled activity in the Chinese economy, the investment response there is likely to be more muted.
 
S&P reiterates its concern that China might retaliate with
non-tariff actions.
 
“With China running out of room to retaliate on goods (i.e.
85% versus 50% coverage), China could opt to pursue non-tariff actions affecting services and investments from the U.S.,” it says.
 
“The U.S. enjoys a net services surplus with China. Such retaliation would further exacerbate investor worries, damaging business and consumer confidence, as well as growth prospects.”  www.standardandpoors.com (ATI).