After tensions reached new heights this week, US President Donald Trump has partially retreated from his global trade crusades. The bond market reportedly has aversion to the serious and sudden changes in trade policies that have seen US Treasury yields have risen significantly recently, and Trump has suspended it. Tariff hikes in all countries except China have temporarily dropped from the much higher fees mentioned above to 10% (for example, 20% in the European Union and 24% in Japan). This grace lasts for 90 days, and ostensibly the rewards of these countries for refraining from massive retaliation in response to the first salvo of US tariffs.
Washington’s tolerance provides a reliver sliver to our consumers staring at the self-induced stag outlook. The suspension will reduce the effective US tariff rate from 25% as of April 2 to about 20%, but it is still at astronomical level. A partial setback against the majority of Trump’s trading partners, if maintained, should reduce the impact of tariffs on short-term price growth in the US. Still, we have a significant increase in inflation, slower economic growth, and 40% risk of a 2025 US recession.
Still, Trump has picked out China in retaliation for US taxation and raised tariffs on Chinese goods to 145%. This is not a positive development for American households, with approximately 13% of the goods imported by the US in 2024 being sourced from China. Furthermore, this may not be the end of the conflict. As we are I wrote about it beforein such disputes, escalation of the tert is common, and it is considered plausible that tariffs will rise further before they reach their peak.
Expect more government stimulus in China as exports slide
If US tariffs remain at current punitive levels, China’s exports are set to effectively contract, which will have a significant impact on the country’s GDP over the next few years. A global slowdown in demand – likely secondary effects of Trump’s tariff shock – could have weighed even heavily on China’s economic growth. In the face of this, Chinese policymakers will likely provide generous support to the economy.
To this end, there is likely additional financial support for the cards, and China has expressed its willingness to expand its fiscal deficit if stimulation is needed. Importantly, the People’s Bank of China has already begun supporting it, and the yuan will drop to its weakest level against the US dollar for over a decade. This demonstrates China’s willingness to allow the original value to fall, and it believes it will help offset the impact of the trade war on the country’s economy.
What does the original mean to China?
Allowing the Yuan to further adapt to the trade war will help limit the extent of China’s decline in exports. Even after modest exchange rate depreciation, the US tariff hike of 145% makes Chinese imports generally prohibitively expensive. US importers with alternatives will switch quickly. Ultimately, almost all US-China trade flows could be drained. However, depreciation of exchange rates will help China improve its competitiveness and compensate for exporters’ loss of US volumes by earning stock profits in other parts of the world. When exporters hold the amount they assume to be paid in foreign currency, and when exporters are paid in foreign currency, exporters’ income in local currency terms will also increase, providing additional cushioning to tariff shocks.
China’s exports may still find their way to the US indirectly through transportation. Intermediate inputs exported from China can be packaged into finished products exported from third-party countries to the US. Sometimes, items may be shipped from China to third party countries for the most superficial processing. After hiking US and China’s tariffs in 2018-19, such transshipment flows increased significantly.
The main area of uncertainty is the measurements the US needs to crack down on transshipment. The US could try to impose supplemental tariffs on Chinese content embedded in exports from other countries, but such a system is both troublesome and perhaps too unrealistic to work with.
Fix: Previous versions of this article included an incorrect percentage of US tariffs against China.
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