In China, Trump faces a rising superpower with the economic might to hold its own.
KUALA LUMPUR: Fitch Ratings views the US-China tariff proposals, which had recently roiled the equities markets, may well be part of diplomatic positioning for negotiations.
It said on Tuesday the proposals “may never come into effect should a mutually agreeable deal be reached that addresses US concerns over the bilateral economic relationship”.
In the latest development, global equity markets rallied and the Japanese yen fell as Chinese President Xi Jinping's promise to cut import tariffs eased investor concerns about an escalating US-China trade row, Reuters reported.
Commenting on the tariffs, Fitch said for now, the specific proposals of US$50bil of tariffs from both countries are targeted as opposed to across-the-board and small relative to the overall size of their respective economies.
“Should they be implemented as proposed, we believe that the direct macroeconomic effects on trade, growth and confidence, both globally and for the US and China, would be limited,” it said.
Fitch continues to forecast for US GDP growth to accelerate this year to 2.7%, with the short-term economic outlook improving alongside loose fiscal policy, wage growth and improved investment.
Individual sectors could be affected by the implementation of targeted tariffs though, even if the overall macroeconomic outlook is broadly unchanged.
“Importantly, no US-China tariffs have been implemented yet. The US' initially proposed US$50bil in tariffs are subject to a consultation process so the earliest tariffs are likely to come into effect are the end of May or early June.
“As such, the tariff proposals may well be part of diplomatic positioning for negotiations and may never come into effect should a mutually agreeable deal be reached that addresses US concerns over the bilateral economic relationship,” it said.
In its report, Fitch Ratings had cautioned that escalating tariff proposals by both countries were increasing the risks of a full-blown trade war.
“The most likely outcome remains a negotiated solution to US-China trade tensions that has limited effect on the near-term growth outlook in both countries and leaves Fitch's base case global macroeconomic forecasts intact,” it said.
However, Fitch also did caution the risk of a more material impact was growing.
Tariff proposals by the US and Chinese governments last week marked an escalation in protectionist rhetoric between the world's two largest economies.
China proposed levying retaliatory tariffs against US$50bil in US products and US President Donald Trump stated that he was considering additional tariffs on a further US$100bil in Chinese goods to the US$50bil he had initially proposed on March 22.
Fitch noted that China was reported to have signalled that it would respond further to such action.
“Whether this would come in the form of retaliatory tariffs non-tariff protectionist measures or a combination remains to be seen,” it said.
The US exported US$187bil in goods and services to China in 2017, according to the US Bureau of Economic Analysis.
By means of illustration, US$150bil in exports is equivalent to 0.8% of US GDP and 1.3% of China's GDP. The direct impact of tariffs of 25% on trade flows of this size would be 0.2% of US GDP and 0.3% of China's.
“The potential for trade protectionism to negatively affect the U.S. and China's growth outlook is rising with every incremental escalation in tariff rhetoric, which could lead to a full-blown trade war.
“We maintain that this would be an extreme scenario, but the implications of such a wide-ranging tariff war would be significant.
“Both the US and China would see GDP reduced by over two percentage points from the base line after two years with China being more affected.
“Other major economies including the Eurozone, Japan and the UK would see lesser negative effects but still see growth deceleration.
“Market reaction to rising uncertainty could pose macroeconomic risks even before the tariffs' actual implementation,” it said.
Fitch said a significant Chinese yuan depreciation, for example, would likely cause a shock to global markets and potentially affect investment and global trade flows.
For now, the specific proposals of US$50bil of tariffs from both countries are targeted as opposed to across-the-board and small relative to the overall size of their respective economies.
Should they be implemented as proposed, we believe that the direct macroeconomic effects on trade, growth and confidence, both globally and for the US and China, would be limited.
“We continue to forecast for US GDP growth to accelerate this year to 2.7%, with the short-term economic outlook improving alongside loose fiscal policy, wage growth and improved investment.
“Individual sectors could be affected by the implementation of targeted tariffs though, even if the overall macroeconomic outlook is broadly unchanged,” said Fitch.
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