Republican presidential candidate Donald Trump has said he could impose a 60% tariff on Chinese imports if he returns to the White House, and a new analysis predicts that would significantly slow the world’s second-largest economy and push it to the brink of recession.
Given the effects of Trump’s tariffs on China in 2018, UBS economists have provided a simplified model of what a new round could do, assuming that China doesn’t retaliate, other countries don’t match the U.S. tariffs, and some trade is diverted elsewhere.
They estimate that a 60% tariff would slow Chinese GDP growth by about 2.5 percentage points over the next 12 months. About half of that decline would come from lower exports, with the rest coming from indirect effects on consumption and investment.
Beijing’s stimulus policies to mitigate the impact of the tariffs are expected to reduce the economic drag by 1.5 percentage points, prompting UBS to estimate that GDP growth in 2025 and 2026 could fall to around 3% if the hike is implemented in mid-2025. That’s lower than the bank’s baseline forecast of 4.6% and 4.2%, respectively.
“Over time, increased exports and production in other economies could help mitigate the impact of higher U.S. tariffs, but there is also the risk that other countries could raise tariffs on imports from China as well,” UBS economists wrote in a note published Monday. “Furthermore, the ongoing impact of weaker employment and capital spending will weigh on the domestic economy as well.”
If China retaliates in kind, the economic impact will be more severe, while less severe tariffs will have a smaller impact, the note added.
But the mere threat of such a tariff hike could hurt China’s economy. Even if the tariff hike is reduced or avoided, “some economic damage is inevitable as U.S. producers and importers move away from China to avoid risk and uncertainty,” UBS warned.
China’s economy is already slowing amid an ongoing property crash, weak domestic demand, massive local government debt, and the Biden administration’s expansion of trade restrictions.
In the second quarter, GDP grew 4.7%, down sharply from the previous quarter’s 5.3% pace and below the government’s 5% target. A recent meeting of top policymakers produced few signs that Beijing is about to take aggressive steps to stimulate the economy.
Meanwhile, demand in China has been so weak that consumer inflation was 0.2% year-on-year in June. At the same time, producer prices have already started to fall.
A 60% tariff would add further deflationary pressures by dampening demand and intensifying price competition, the UBS note said. The result would be domestic producer prices remaining deflationary through 2025 and core consumer inflation remaining at 0%.
This means that overall consumer inflation could remain stuck around 0.5% over the next two years – about one percentage point below the bank’s current baseline forecast.
Even before Trump’s improving election prospects raised the prospect of new tariffs, views on the Chinese economy had already darkened.
“Years of erratic and irresponsible policies, excessive Communist Party control, and unfulfilled promises of reform have created a dead-end Chinese economy characterized by weak domestic consumer demand and slow growth,” said Anne Stevenson Yang, co-founder of J Capital Research and author of “The Chinese Economy: How Should We Deal with China?” Road Trip: A Brief Look at China’s Economic Opening and ClosingHe wrote in The New York Times Editorial in May.