Trump’s punitive tariffs not only harmful to China but also the whole of Asia

Until now China’s economy has managed to withstand the imminent burdens of the US-Chinese trade conflict, as indicated in the latest data on economic growth. However, this is likely to change soon as higher tariffs to the tune of USD 250bn – i.e. two percent of the country’s economic output – are imposed on Chinese exports as the next escalation level in the trade dispute with the US takes off. This now represents more than just a slight risk to the country’s economic growth.

Exports to the USA will clearly not collapse in full as a result of the import duties, but they can be expected to decline sharply. The extent of this depends above all on how sensitively US consumers and companies react to the increase in prices for imported goods from China. Based on numerous empirical studies, we assume a value of -2 for the so-called price elasticity of US import demand, i.e. a price increase of 10 percent would reduce demand by 20 percent. The 25 percent tariffs already imposed on Chinese exports for goods worth US 50bn would therefore lower exports to the USA by US 25bn. The planned 10 percent tariff on exports worth US 200bn could dampen exports by a further US 40bn. All in all, this corresponds to approx. 0.5 percent of China’s economic output.

However, the preliminary work that China itself imports must also be taken into account here. This accounts for about one-fifth of all Chinese exports. If China’s exports fall, the country will inevitably also curb imports of preliminary products and thereby temper the negative growth effect for China. This is then estimated to amount to 0.4 instead of 0.5 percentage points. Conversely, the burdens of US customs tariffs will also have an impact on supplier countries which, as „co-producers“ of Chinese export goods, are also likely to suffer growth losses depending on the value-added that they generate. The Asian neighbouring countries of China, which are almost all closely involved in the production chains with China, will therefore be particularly affected.

The importance of China as a sales market for its Asian neighbours can be clearly seen in the high export quotas: for most countries in the region, exports to China account for over 6 percent of their gross domestic product (GDP), and for Taiwan and Singapore as much as 14 percent and more. Since the more developed countries in the region such as Taiwan, South Korea, Singapore and Malaysia show high export quotas to China, particularly in the area of high-quality industrial goods, their value-added share of China’s exports is also disproportionately high. Taiwan has the highest share in terms of its own GDP. Taiwan and then Malaysia, South Korea and Singapore are therefore likely to suffer most if China were to greatly curb its demand for preliminary products as a result of US tariffs. Based on OECD calculations, we have calculated growth losses of between 0.1 and 0.3 percentage points for China’s neighbouring countries, with the losses likely to be highest in Taiwan and Malaysia since both countries are particularly important suppliers of preliminary products for China in the IT and electronics sector.

This means that some Asian countries would be almost as badly affected by US tariffs as China itself. China’s export successes and intensive production links with its neighbours have strongly boosted export momentum and economic growth in Southeast Asia in the past; this positive stimulus could now be curtailed by US tariffs. The effects on growth in Asia can be mitigated somewhat by opposing factors, such as weaker imports or expansionary fiscal countermeasures. On the other hand, second-round effects on the labour market, for example, could exacerbate the situation.

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