20 September 2018
Bob Cunneen, Senior Economist and Portfolio Specialist
Source: Federal Reserve Bank of St Louis and Reuters Datastream
President Trump has just confirmed another 10% tariff on US$200 billion in imported goods from China. This is the second round of ‘Trump’s trade war’ following the earlier 25% tariff on US$50 billion on Chinese imports. So President Trump has effectively escalated the conflict since the bold Twitter tweet that “trade wars are good and easy to win”.
China’s tariff response has been more modest. China has imposed tariffs on US imports totalling only US$110 billion. China’s restraint in applying equivalent tariffs may reflect a number of factors. China imported only US$130 billion in goods from the US in 2017, so is running out of goods to apply tariffs to. China also wishes to negotiate an early end to this trade war given the downside risk to their economy. A trade war could lower China’s economic growth by up to 1% by penalising exports and damaging investment.
Where China has been more active in defending their economy is by providing easier monetary conditions. China’s central bank has assertively added cash to the financial system which has lowered interbank interest rates from 4% to 2.6% since May (blue line). This should eventually lead to lower interest rates for businesses and households. China has also guided the Chinese currency to fall by 7% against the US dollar (red line). This should help Chinese exports to stay price competitive. Both of these Chinese monetary measures are critical parts of the Great Wall’s defence against President Trump’s trade threat.
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