On September 17, the US Trade Representative (USTR) published the final list of US$200bn Chinese goods on which the US will impose additional tariffs. The additional tariffs will be effective starting September 24, 2018, with an initial duty of 10%. Starting January 1, 2019, the additional duty will increase to 25%. The White House also said that if China takes retaliatory action against US farmers or other industries, the US will immediately pursue tariffs on approximately US$267bn of additional imports.

The final list removes a fraction of items compared with the originally published list. The final list released on September 17 contains 5,745 items, 297 items less than the list released on July 10. The items removed include some consumer electronics (such as smart watches and Bluetooth devices), some chemicals (used in manufacturing, textiles and agriculture), as well as some health and safety items (such as bicycle helmets, playpens and car seats for children).

The US$200bn list mainly consists of intermediate products and capital goods, but also contains quite a few consumer goods. Consumer goods, such as luggage, furniture and lamps, make up about 22% of the US$200bn list. In contrast, the previous US$50bn lists contain few consumer goods. So far, the US has imposed or decided to impose tariffs on US$250bn of Chinese goods, of which intermediate products, capital goods and consumer goods account for about 50%, 32% and 17%. The tariffs have covered 29% of consumer goods the US imports from China, still lower than the 39% for capital goods and 74% for intermediate products. Consumer goods such as textiles, footwear, mobile phones and tablets have not yet been hit by the tariffs. If the US further expands the tariff scope, US consumers will be more affected.

So far, the impact of US tariffs on China is not obvious yet. Although the US imposed 25% tariffs on US$34bn of Chinese goods on July 6 and on another US$16bn of goods on August 23, China’s exports to the US continued to grow fast as of August. In January-August, China’s exports to the US increased 12.3% YoY and trade surplus with the US expanded 13.8% YoY. On the one hand, the renminbi has depreciated by over 8% against the US dollar since 2Q18, to some extent easing the impact of tariffs. On the other hand, exporters may have front-loaded their exports ahead of more tariffs. Such factors supported recent exports to the US.

The impact of tariffs on US$200bn of goods may gradually emerge in the coming months. We estimate the short-term price elasticity of China’s exports to the US at about 0.6. The US’s 25% tariffs on US$250bn of Chinese goods may cause US imports from China to decline US$37.5bn, or 7%-8% of China’s exports to the US. That is about 1.7% of China’s total exports, or 0.3% of China’s GDP. As the latest tariffs will start at 10% and then rise to 25% next year, the impact may also come gradually. However, considering exporters may have front-loaded some export, we may see sudden drop in China’s exports to the US in some months.

The trade friction may escalate further. On September 18, a spokesperson for China’s Ministry of Commerce said that the Chinese government will have to take countermeasures. On August 3, the Ministry of Commerce had published a US$60bn list of US goods on which China plans to impose tariffs of 5%, 10%, 15% and 25%. The tariff measure may be partially implemented when the US’s 10% tariffs take effect on September 24. According to the White House statement, the US may pursue tariffs on a further US$267bn of imports from China. The external demand faces more uncertainty.

China will increase fiscal spending and infrastructure investment to stabilize economic growth in the short term. Fiscal revenue grew 9.4% YoY in January-August while fiscal expenditure increased only 3.3%. The fiscal deficit in January-August was lower than a year earlier. Given the annual budget, fiscal expenditure should increase in the remainder of the year. We expect infrastructure investment growth to bottom out. However, increasing infrastructure investment will also push up government debt and potentially bring long-term risks. From a medium-to-long-term perspective, reducing taxes and fees can better improve the efficiency of resource allocation and long-term economic growth than increasing infrastructure investment. While countercyclical policies may help China cope with short-term external shocks, further structural reforms hold the key to resolving long-term risks.