Counting the cost of the US-China trade war so far

US President Donald Trump’s fresh threats of tariff hikes on Chinese imports this week marked a new escalation in the trade dispute between the world’s top two economies and a reversal of months of apparent progress in negotiations.

The trade war formally kicked off in July last year with tariffs on US$34 billion of Chinese imports, which were followed by tariffs on an extra US$16 billion in August and another US$200 billion in September. China has retaliated on each of these measures with its own set of tariffs.

A subsequent threat to raise tariffs on the September list of products to 25 per cent from 10 per cent in March was suspended, pending trade talks.

In the latest development, Trump on Sunday said those increases could now take effect on Friday and that he would target a further US$325 billion of Chinese goods “shortly”. All up, the tariffs would effectively cover all imports of Chinese goods into the United States.

Here is a look at the impact the US-China trade war has had so far on the two economies and the rest of the world.

Bilateral trade

China’s customs data shows exports to the United States in March fell 47 per cent from June 2018, which was the last month before the first round of tariffs kicked in. Imports from the United States in March were 17 per cent lower.

Cumulatively, in the first quarter of 2019, Chinese imports fell almost a third year-on-year, while exports fell almost a tenth. In dollar terms, a decline in two-way trade of US$25 billion accounts for around 0.5 per cent of global trade.

Compounding the decline in imports into China was a broader weakening in domestic demand following Beijing’s campaign against financial risk taking.

The bulk of the decline in US exports to China is in raw materials and food. They represent about a third of the total and have more than halved, according to Oxford Economics. But US firms in other sectors, including Caterpillar and Apple, have also issued China sales warnings.

Of all Chinese exports to the United States, machinery and electrical equipment have taken the biggest hit.

Growth

Most analysts estimate direct US losses so far of 0.1 to 0.2 per cent of gross domestic product, while for China the damage could be 0.3 to 0.6 per cent of GDP. These could grow with more, and higher tariffs.

Theses estimates, however, do not take into account how the trade war impacts investment and spending decisions by firms and consumers while domestic policy measures also muddy the waters considerably.

Partly reacting to external headwinds, the US Federal Reserve has put monetary policy tightening on hold with markets now actually forecasting a rate cut this year.

China has also responded with cuts in bank reserve requirement ratios, which have boosted domestic lending to a record 5.81 trillion yuan (US$862.8 billion) in the first quarter. Tax cuts are estimated to unleash an extra two trillion yuan, while local governments are also allowed to issue 2.15 trillion yuan of special bonds to fund infrastructure projects.