Trump's China Tariff Hikes Could Smother US Economic Growth: Fitch Ratings Sounds Alarm

Zinger Key Points
  • Fitch warns Trump’s proposed tariffs on China could slash US GDP by up to 0.8%, worsening to 1.1% if partners retaliate.
  • Immediate inflation might rise by 0.4pp, but Fitch predicts a medium-term decrease due to softer demand.

Fitch Ratings has issued a stark warning about the potential economic fallout of aggressive trade tariffs proposed by former President Donald Trump should he win this year’s presidential elections.

The credit rating agency predicts that significant increases in U.S. trade tariffs, especially against China, could lead to a noticeable reduction in both U.S. and global economic output.

In a newly released report, Fitch managing director Brian Coulton outlines that “sharp increases in U.S. trade tariffs seem highly likely in the event of a second Donald Trump presidency.”

The potential for a renewed U.S.-led trade war in 2025 is growing, with Trump suggesting possible tariff hikes on Chinese goods of up to 60%, alongside an across-the-board 10% tariff on all US imports.

Economic Impact Of Trump-Led Tariffs

Fitch’s findings are stark: should the U.S. impose aggressive tariff increases, its GDP could suffer an immediate decline of between 0.4% and 0.8%. This impact could deepen to 1.1% if US trading partners retaliate with similar tariff increases.

While such tariffs might cause a short-term spike in inflation by up to 0.4 percentage points, Fitch notes that, over the medium term, inflation could actually decrease due to reduced demand and easing price pressures.

The repercussions for U.S. trading partners would be even more significant, particularly if they respond with retaliatory tariffs. Countries like China, Canada, and Mexico would see the most substantial economic downturns due to their extensive trade ties with the US. In the worst-case scenario, these countries could see average GDP declines of around 1.8%.

The belief underlying these potential policies is that free trade and relatively lower tariffs compared to major trading partners have contributed to the widening U.S. trade deficit since the late 1990s. Protectionist policies are viewed as a means to encourage the reshoring of American manufacturing and jobs.

However, Fitch Ratings suggests that the persistent large U.S. trade imbalance is more a reflection of the disparity between U.S. national savings and investment and ongoing capital inflows into the country.

US vs. China: Stock Performance During Trump Presidency

Between Jan. 20, 2017, and Jan. 20, 2021, during Trump’s term as president, the S&P 500 index, as measured by the SPDR S&P 500 ETF Trust SPY, experienced an 82.6% rally.

In comparison, the broader Chinese stock market, as gauged by the SPDR S&P China ETF GXC witnessed a 106% surge, thus outperforming the S&P 500.

However, when considering the performance of the respective tech sectors, the Kraneshares CSI China Internet ETF KWEB rose 150%, while the Nasdaq 100, as closely monitored through the Invesco QQQ Trust QQQ skyrocketed 172%.

Read now: Chinese Stocks Surge As Investors Bet On Economic Turnaround: 7 ETFs To Watch

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