US cuts to China tariffs may boost yuan 1.2% or more: Goldman
ROLLING back tariffs on Chinese goods may reduce US inflation and push the yuan up 1.2 per cent against the dollar should Washington remove levies on all consumer products, according to Goldman Sachs Group economists.
Exempting Chinese consumer goods from Trump administration-era tariffs would translate into US$18 billion less of revenue and drive the renminbi higher, the economists said in a note Wednesday (Jun 8), citing how the yuan reacted during the US-China trade war. If all Trump tariffs were lifted, the yuan could appreciate 4.9 per cent.
The Goldman economists said major tariff reductions are unlikely as the US would risk appearing "soft" on China ahead of midterm elections in November. While US President Joe Biden has said he would review Trump-era levies, US Trade Representative Katherine Tai has signalled caution, saying that Washington must be "strategic" when it comes to a decision.
"Partially removing or granting more exclusions for some of the tariffs imposed by former President Trump on Chinese imports during the 2018-19 trade war has been suggested as an additional policy tool to cool inflation," Goldman economists led by Hui Shan wrote. With US consumer prices reaching multi-decade highs, inflation has come to pose a major threat to Biden's popularity.
For the yuan, the economists said that there are other drivers that may outweigh the impact of tariffs beyond the immediate effect of an announcement of a rollback, including the dollar's broader direction and China's growth outlook.
They said the economic implications of partial tariff reductions are likely to be "modest". Even if all of Trump-era tariffs were lifted, the boost to China's real gross domestic product growth may be smaller than 0.5 percentage point. If US tariffs on another 20 per cent or so of Chinese goods are lifted, the positive impact could be less than 0.1 percentage point, they said.
"That said, short-term dynamics could be bigger," the economists added. "For example, exporters may delay shipments until tariffs reductions take effect, just like they frontloaded exports before tariff increases during the 2018-19 trade war." BLOOMBERG
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