New Round of US Tariffs Might Have a Greater Impact Than the Previous One

Abstract: During the last round of China-U.S. trade tensions, although the bilateral trade volume between the two countries experienced a noticeable decline, inflation in the United States appeared largely unaffected. Meanwhile, China’s total export volume did not decrease, and its share of global exports remained stable.

We believe that three factors—currency depreciation, export VAT refund, and trade reroute—are key to understanding why the previous round of trade tensions did not result in substantial shocks to either country. Currency depreciation and export VAT refund provided a 10-percentage-point cushion for trade price fluctuations, while trade reroute softened the apparent contraction in U.S. imports from China. Together, these factors mitigated any significant macroeconomic impact on both sides.

Currently, neither trade reroute nor currency depreciation is likely to provide the same level of cushioning, and the macroeconomic conditions in both China and the United States differ significantly from 2018. As a result, the tariff impacts this time may be more pronounced, with a degree of symmetry in their effects on both countries. Under these circumstances, China should proactively consider bolstering macroeconomic policies to address potential external shocks. Moreover, the impact of tariffs extends beyond the real economy to financial markets, warranting close attention from regulatory authorities to potential consequences.