Anis Bensaidani:
The tariff offensive led by Donald Trump since his return to the White House has quickly shifted into a face-off with China.
Following a cycle of announcements and retaliation, the extra-tariffs applied by the United States to China amount to 145%, compared to 125% in the opposite direction.
The shock is of unprecedented magnitude, and the two superpowers are engaged in a negative-sum game.
Christine Peltier:
Trade between China and the United States is going to collapse, by roughly 80% according to the first projection of the WTO.
For China, the loss of activity could be huge. This is the case even if its direct exposure to the US market is quite modest, with its exports of goods to the US representing only 2.6% of GDP.
The expected loss of GDP could exceed 2 points in a fairly short time. But this initial estimate excludes the positive effects of all the strategies and policy measures that will be implemented by Beijing to offset the negative effects of tariffs. On the price side, the decline in exports to the United States will fuel the deflationary pressures that are already existing in China.
Anis Bensaidani:
On the American side, the recession risk has re-emerged in the face of uncertainty and tariff shocks.
The stock and bond markets’ backlash which followed the Liberation Day have already caused the beginning of a US reversal and a strategical refocus on China.
Still, the US average effective tariff rate will eventually set significantly above its pre-2025 level. This, in turn, will raise inflation and dampen demand. Our calculations as of April 12th indicate that only 18% of imports avoid additional customs duties.
Moreover, these erratic policy changes probably imply long-lasting damages on the global macro picture. Finally, in 2025, US growth is, at best, heading for a sharp slowdown.
Christine Peltier: Why are we in this situation today? What are the goals of the Trump administration?
Anis Bensaidani:
Broadly speaking, the American strategy aims to leverage its dominant position to reshape economic relationships advantageously and enhance its domestic manufacturing production.
In practice, this could involve investments and/or reshoring to the United States, lowering tariffs on US products, or agreements on Treasuries
In the US/China case, it is a question of isolating the adversary and pushing its advantage to extract major concessions.
The United Stats expects China to reduce its trade imbalances, boost domestic consumption, cease currency undervaluation, or increase cooperation on issues such as intellectual property, opioids, or tiktok.
Indeed, the Trump administration has been repeatedly calling China to come to the negotiating table.
Christine Peltier:
However, it is difficult to imagine negotiations, given the high level of tensions and the divergent positions between the US and China.
From Beijing's point of view, China has less to lose than the US; it has prepared for the shock and Chinese factories depend less on US products than the other way around.
That being said, it is in the interest of both sides to negotiate to at least roll back the latest tariff measures. A deal similar to the “Phase 1” agreement reached in 2020 is possible. China would commit to buying some US goods, notably energy and agricultural products.
China has pawns to advance at the negotiating table, for example thanks to its largely dominant position in the critical materials sector.
Its position regarding its portfolio of US Treasury bonds is more delicate. Selling these securities to put pressure on Washington is unlikely in the short term, because this could prove to be a destabilizing and costly strategy. On the other hand, we can expect some financial decoupling between China and the US to continue gradually and go with trade decoupling. China has already reduced its US Treasury bond portfolio by more than a third over the past decade.
In view of the growing risks, which action can be pursued by the policymakers to absorb the short-term shock?
Anis Bensaidani:
On the fiscal side, the Trump administration is pushing Congress to approve a significant tax cut package. However, the actual effect could turn out to be counter-productive. A further slippage in public finances could trigger a bond sell-off and a tightening of financial conditions. Moreover, the issue is particularly sensitive in a context of growing questions about the safe-haven status of Treasuries, while U.S. 10-year yield have jumped by 50 basis points during the week of April 7th. As for monetary policy support, it is unrealistic in the face of inflationary risk and without material deterioration in labour market metrics
Christine Peltier:
In China, the authorities have sharpened their weapons for some time and they are expected to quickly launch new stimulus measures.
On the monetary front, interest rates and reserve requirement ratios are expected to be reduced soon. The main state-owned banks have recently received capital injections to strengthen their capacity to cope with the shock and support activity.
Also, the finances of local governments have been strengthened. They remain weak, but local governments have gained some little room to maneuver to increase their spending and investments. The central government will also participate in the stimulus plan.
Given the current external shock, it is becoming even more urgent for the Chinese authorities to adopt ambitious measures and structural reforms to stimulate private consumption.
Finally, China will try to strengthen its ties with other trade partners, especially in Asia and Europe. At the same time, it will continue to reroute its exports to third countries. Therefore, these countries will have to face higher tariffs in the US, weaker US demand, the global economic slowdown, and rising competitive pressure from Chinese products.
Anis Bensaidani:
The Sino-US conflict could also open up new opportunities for exporters to substitute these countries, as was the case during the first version of the trade war.
