In the past two weeks (from May 9, 2022 to May 20, 2022), there have been growing calls for the United States to cut tariffs on China. However, compared with the previous similar news, the market did not “buy” this time, and the “US stock tariff loser basket” did not significantly outperform the market. Under the background of high inflation and increasing pressure from business and consumers on the U.S. government, how large and how fast will Biden cut tariffs on China and suppress inflation? We will discuss it in this paper.
There are differences within the US government on reducing tariffs on China, and in our view, the supporters dominate, including Treasury Secretary Yellen and Commerce Secretary Raymond.
Yellen believes that punitive tariffs on China should be abolished because it is of no strategic significance to solve the problems between the two countries; However, Dai Qi, the trade representative, prefers to temporarily maintain tariffs until a broader trade strategy with China is introduced. We think Biden is more influenced by Yellen. As shown in Table 2, Yellen, as the third person in Biden’s cabinet, ranks second only to Vice President Harris and Secretary of state Antony Blinken. Relatively speaking, Dai Qi ranks lower. Superimposed on the recent pressure from the business community, the political environment in the United States has increased the possibility of reducing tariffs on China. However, considering the differences between American officials, the scale of reduction is limited.
In terms of time points worthy of attention, the first is the call that the US dollar may hold for the first time in the next few weeks (revealed by US national security adviser Sullivan on the 19th). At that time, Biden may release more signals on reducing tariffs on China. In addition, July 6 and August 23 are the due dates of 301 tariff list 1 and list 2 (involving a total of $50 billion in goods), respectively, and the review procedure has been started. The US government will pay close attention to the necessity of tariff reduction to China in the first stage or the follow-up investigation in late August.
Now let’s take a look at how high the tariffs imposed by the United States on Chinese goods are? According to the calculation of Peterson Institute of economics, under several rounds of tariff increases, the average tariff rate of Chinese products imported by the United States has increased from 3.8% in June 2018 to 19.3% in May 2022; The scope covers 66% of US imports from China, involving US $335 billion (measured by US imports in 2017).
The mutual tariff increases between China and the United States have mainly gone through three stages: (1) the mutual tariff increases (from July to September 24, 2018), during which the average tariff rate of the United States to China rose to 12%; (2) The buffer period of almost no change in tariffs (September 25, 2018 to June 14, 2019); (3) The average tariff rate of the United States against China rose to 21% once. Since the signing of the first phase agreement in January 2020, the United States has reduced the tariff rate imposed on some goods to China, but the average tariff rate to China remains high.
How much will tariff cuts help reduce US inflation? We expect inflation to be suppressed by less than 0.5%. Although the range is limited, it is still a comfort to consumers against the background of the conflict between Russia and Ukraine and the disturbance of the global supply chain.
The Biden administration hopes to reduce US inflation and restore some public support by reducing tariffs on China. Since inflation soared in the third quarter of 2021, Biden’s poll support rate has fallen to less than 42% (2022 / 5 / 18), and American people’s confidence in the Democratic controlled Congress has also been eroded. Under the pressure of public opinion, Biden said in a speech on May 10 that dealing with inflation is a priority of the US government.
However, the reduction of tariffs on China has limited suppression on US inflation, which is not enough to hedge the impact of the Russian Ukrainian conflict. According to the calculation of Peterson Institute of economics, the direct impact of abolishing tariffs on China will reduce US CPI by 0.26% and PCE by 0.35%. On the one hand, the OECD predicts that the conflict between Russia and Ukraine will push up US inflation by 1.4%; On the other hand, the outbreak in China has exacerbated the interruption of global supply chain. The New York Fed global supply chain pressure index, which has been falling since the beginning of 2022, rebounded in April.
What is the market impact of the US tariff reduction on China? The commodities subject to tariff increase by the United States to China are mainly mechanical and electrical equipment, transportation equipment and steel. If the United States reduces the tariff increase on imported commodities to China, the industries or income represented by TMT, upstream and downstream of steel and automobile in A-Shares will be reduced. In terms of US stocks, as mentioned above, the market has not yet conducted large-scale transactions, and the United States has reduced tariffs on China.
Generally speaking, we believe that the United States will reduce tariffs on China during the trump period, especially tariffs related to consumer goods, but we do not rule out the subsequent announcement of some additional restrictions on non consumer goods or the opening of investigations by the U.S. government, so as to show its strong attitude towards China and “show off” for the mid-term election.
Risk tip: covid-19 virus mutation leads to vaccine failure, and the outbreak of confirmed cases leads to the return of the U.S. economy to blockade; The situation in Russia and Ukraine is out of control, causing sharp fluctuations in commodity prices
