The latest decision by United States President Donald Trump to add new tariffs on Chinese goods from next month will further weaken capital investments in China, some economists say.
New tariffs on Chinese goods will hurt foreign companies’ investment confidence in China and also force many China-based manufacturers to relocate their factories to Vietnam, Thailand and Malaysia, Nathan Chow Hung-lai, senior vice president and senior economist of DBS Bank Hong Kong, told Asia Times.
China-based manufacturers can have similar operations in Malaysia and Thailand as they now have in southern China, Chow said. They can also enjoy low production costs in Vietnam, he added.
Chow forecast that the new tariffs on Chinese goods would hit China’s gross-domestic-product growth by 0.2 to 0.3 percentage points on top of the 0.9 percentage point decline caused by the previous tariff hikes.
Apart from fiscal measures, China should consider unveiling monetary measures, such as reserve requirement ratio (RRR) and interest rate cuts, to boost its economy. It may also have to depreciate its currency to support its exports, he said.
On Thursday, US Trade representatives returned from Shanghai after talks with Chinese officials. On the same day in US time, Trump announced on Twitter that the US would add an additional tariff of 10% on the remaining US$300 billion of Chinese goods and products.
Read: Trump risks recession with tariff hike
“We thought we had a deal with China three months ago, but sadly, China decided to re-negotiate the deal prior to signing. More recently, China agreed to buy agricultural product from the US in large quantities, but did not do so,” Trump wrote in a Tweet.
“We look forward to continuing our positive dialogue with China on a comprehensive Trade Deal, and feel that the future between our two countries will be a very bright one!” he added.
State Councilor and Foreign Minister Wang Yi told Chinese media at the ASEAN Foreign Ministers Meeting in Bangkok on Friday morning: “I have just seen the news. Adding new tariffs on Chinese goods is absolutely not the right method to resolve the trade conflicts between the United States and China.”
While the lack of progress in trade talks in Shanghai was no surprise, Trump was not expected to restart the threat of tariffs so soon, especially as Beijing had hinted that it would step up the purchase of US agricultural products, Tai Hui, the chief market strategist at JP Morgan Asset Management in the Asia-Pacific.
“This will put tremendous pressure on the next round of trade negotiation, scheduled in early September, assuming Beijing is willing to go ahead given the latest threat,” Hui said.
“This proves businesses are right to be cautious about the global economic outlook, especially on global trade,” he said. “Weak corporate spending is currently the largest threat to global growth, as CEOs are struggling to figure out the trajectory of the US-China trade tension. The abrupt announcement will put more pressure on companies to think twice before investing.”
Trade conflicts have been escalating since Trump increased tariffs on $200 billion worth of Chinese products to 25% from 10% on May 10. On June 1, China raised tariffs on US imports worth $60 billion.
On June 29, Trump and Chinese President Xi Jinping held a meeting on the sidelines of the G20 summit in Osaka in Japan. The two country leaders said they would jointly resolve the US-China trade conflicts. Trump said China had agreed to purchase more agricultural products from the US but no deals were done until this week.
Asian markets fell sharply Friday in response to Trump’s move. Hong Kong tumbled by 2.4%, while Tokyo fell 2.1%. Shanghai was also down by 1.4%.
Read: Trump gives Huawei reprieve as trade talks resume
On July 15, China announced that its economy grew by 6.2% in the first half from a year ago. During the period, consumption and exports contributed 60% and 20.7%, respectively, of Chinese economic growth while capital investments contributed only 19%, according to the National Bureau of Statistics.
Mao Shengyong, spokesman for China’s National Bureau of Statistics, said the contribution of investments particularly in manufacturing and infrastructure to GDP growth remained relatively low. But he emphasized that GDP growth in the first-half was “actually not bad” and “high-quality and sustainable.”