07:32 AM EDT, 04/29/2024 (MT Newswires) -- The possibility of Donald Trump returning as United States president and implementing proposed tariffs of 60% or more on all Chinese imports has policymakers in Beijing, exporters and financial markets assessing the economic impact of any changes to US-China trade after the 2024 U.S. presidential election, said ANZ Bank.

Phase One of the Economic and Trade Agreement signed in 2020 included a commitment from China to buy $200 billion more from the U.S. than it had in 2017. This target wasn't met, largely due to the pandemic, wrote the bank in a note to clients. A possible new Trump administration seems likely to increase the pressure and seek more obligations in any Phase Two Agreement.

The U.S. contributes to China's economy by importing Chinese goods and exporting technology, noted ANZ. The US also exports agricultural and energy commodities to China. There is considerable US consumer demand for U.S. brand manufacturing in China. There are also financial links with China holding US Treasury (UST) and other USD-denominated assets.

Balance of payments data from the U.S. Bureau of Economic Analysis shows China's receipts from the U.S. are almost twice the value of receipts from China to the US. In 2023, the U.S. received $216 billion from China, comprising goods and service trade as well as investment income, representing 0.8% of the U.S. gross domestic product. However, China made $487 billion from the U.S. In other words, the net surplus China received from the US amounted to $271 billion.

During Trump's tenure as president, the US lifted tariffs on Chinese goods from 3% in 2018 to 19.3% in 2020. In the same period, the US goods trade deficit with China declined from $375 billion in 2017 to $308 billion in 2020. The decline may also be due to other factors, such as the U.S. Federal Reserve's tightening in the same period.

A robust method of measuring the impact of the tariff increases is to compare U.S. imports from China against imports from the rest of the world, pointed out the bank. Tariff increases began in July 2018. By December 2019, the U.S. had bought 28% more from the rest of the world than from China compared with July 2018. US imports from China declined 30% by December 2019. This can be seen as the 'first order' effect of the tariffs.

Even after China reopened in 2023, global manufacturers continued to realign their supply chains. This may also be a response to other trade measures imposed by the U.S. under President Joe Biden's administration. U.S. imports from the rest of the world rose 26% between July 2018 and February 2024, while imports from China declined 33% in the same period.

If a new Trump administration were to triple the tariff to 60% or more, the bank expected China's exports to the US would decline by at least another third from the current level. If it applies this change to China's overall earnings from the U.S., the impact on China could be at least 0.9% of GDP.

It is difficult to predict how the US, and then China, may behave, however, it would seem likely that China would respond to any US escalation of trade measures, according to the bank. China's actions could include:

-- More stimulus: The authorities will likely seek to expand the domestic market to offset the decline in exports to the US. Policymakers are likely to still aim for a nominal growth rate of 5%. A CNY1 trillion increase in fiscal spending (0.8% of GDP 2023) could largely offset the loss from the lifting of US tariffs (0.9% of GDP) given the multiplier effect. As half of that will be final consumption, the annual increase in China's consumption market would be around CNY3 trillion.

-- Retaliation: China reacted to the US tariff measures reciprocally in 2018. China may choose to import necessary commodities from other sources. US businesses operating in China may also be targeted. If China also chose to impose constraints against US firms, the opportunity cost to US multinational enterprises could be higher.

-- Trade diversion: Manufacturers in China, both domestic and foreign-owned, could realign their supply chains. A portion of the Chinese value-add is likely to be retained by re-routing through other economies, such as ASEAN nations and Mexico. Protectionist measures are unlikely to completely stop the rerouting of Chinese products.

-- Divesting US assets: The People's Bank of China (PBoC) will have less reason to maintain large holdings of USD assets in its official reserves if bilateral trade declines. Any escalation of trade tension could also lead to the depreciation of the RMB exchange rate, so Chinese authorities could intervene in the market and sell US dollars. Increased trade tension would inevitably result in financial market volatility.

-- Tech development: In the face of external pressure, such as restrictions on access to technology, China has quickened its industrial transformation. New products can become more competitive in both the domestic and foreign markets. Efforts by the US to control China's exports seem to have fuelled chip development in China in the last two years.

What is certain is that protectionism leads to sub-optimal outcomes as it distorts the efficient utilization of capital, labor and technology, stated ANZ. China's strong manufacturing helped the US to lower the cost of production and so control inflation.

To some extent, China's holding of US government bonds and mortgage-backed securities also contributes to raising funds at a lower cost. China-US trade tension, complicated by national security and other geopolitical considerations, has distorted the economic symbiosis that has contributed to global economic prosperity in the past decades, concluded ANZ.