The sky is not falling!

Abstract

As of October 2018, almost half of US imports of goods from China are subject to new US tariffs at various rates, mostly at 10% until the year-end of 2018, when the rates were scheduled to be raised to 25%. These tariff rates will prove to be prohibitive for most if not all of the US imports from China. Assuming that US imports from China will be reduced by half, the initial direct real impact on the Chinese economy may be estimated at a loss of 0.43% of GDP. If indirect effects are included, the full real impact may be estimated at a maximum loss of 1.12% of Chinese GDP. These estimated impacts are relatively small and quite manageable. There is a possibility that the scope of the US tariffs may be expanded to cover all US imports from China, in which case the full negative economic impact will be doubled, but still leaving an expected rate of economic growth in excess of 4%. The Renminbi is not likely to be significantly devalued as a result of the trade war. However, there are also longer-term underlying forces at work behind the China–US trade war – the competition for economic and technological dominance and the rise of populism, isolationism, nationalism and protectionism. It is important for China–US relations, and China’s relations with the rest of the world, in particular with the European Union, Association of Southeast Asian Nations (ASEAN), Japan and Russia, to be carefully managed going forward.