Victory for Donald Trump in the U.S. presidential election could be a game changer for China's economy.
The candidate's promise to slap punitive tariffs on Chinese imports would be highly contractionary, deflationary and wipe hundreds of billions off the value of the world's second-biggest economy, according to new research by Kevin Lai, the Hong Kong-based chief economist for Asia (excluding Japan) at Daiwa Capital Markets.
Lai estimates that Trump's suggestion for a 45 percent tariff on Chinese goods to narrow the trade deficit with America would spark an 87 percent decline in China's exports to the U.S. -- a decline of $420 billion. That would, over time and factoring in multiplier effects, mean a 4.82 percent blow to China's gross domestic product, or about a half trillion dollars' worth. It doesn't even take into account an estimated $426 billion in foreign direct investment repatriation if companies started to withdraw.
"A loss of GDP or a slowdown in GDP growth of this scale would be staggering," Lai wrote in a note entitled "What would a Trump presidency mean for China." "Eventually, Trump and his administration may actually compromise with a watered-down version of tariffs."
Still, even watered-down tariffs to 15 percent would result in a loss of GDP for China of 1.8 percent, again excluding the impact of foreign companies pulling out.
The tariff's would likely be placed on a wide range of goods from machinery and tools to toys and home appliances, according to Lai.
"These tariffs would certainly be detrimental for China, as they would for multinational companies operating in China. These companies would probably have to make plans to relocate to other countries. China would find itself losing to many other developing economies that were not being targeted by Trump."
There are other worries, too. Lai argued that China's balance of payments is a source of concern because of ongoing outflows and that the current account surplus looks vulnerable. Tariffs would bring more pressure and a risk of FDI repatriation that would widen the capital account deficit. Together, this dynamic would put downward pressure on the yuan.
According to statements on his website, Trump has promised to label China a currency manipulator and to "reclaim millions of American jobs and revive American manufacturing by putting an end to China’s illegal export subsidies and lax labour and environmental standards." The Republican Party nominee has argued that the yuan is as much as 40 percent undervalued deliberately to give exporters an advantage at the expense of American manufacturers.
Lai said China's quasi-fixed-exchange-rate regime and regular intervention by the People's Bank of China did help limit the yuan's gains over the past 20 years. At the same time, ultra loose monetary policy in the U.S. supplied China with limitless dollars at a low cost and that China has recycled its surplus savings into funding the U.S. budget.
"Hence, it is really a chicken-and-egg question," Lai said.
Add it all up and a victory for Trump could add severe pressure on China's economy in a period when it's already slowing.
"Obviously, the stakes are very high," Lai said.
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