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Trade war: the risks of escalating customs tariffs


Trade war: the risks of escalating customs tariffs

Saturday, 08/10/2019

The yuan depreciated by about 2.50% against a basket of currencies in a year. (Keystone)

The escalation of tariffs in trade armor between China and the United States could significantly reduce China's economic growth, the IMF said on Friday.

In its Annual Opinion on the Chinese Economy (Article IV), the International Monetary Fund warns that "escalation of trade tensions, including the imposition of 25% tariffs on other imports into China, may reduce 0.8% growth in 12 months".

The IMF has currently confirmed its growth forecasts for China, which is expected to slow to 6.2% in 2019 and then to 6% in 2020, compared to 6.6% last year.

These forecasts apply to constant duties, while currently 25% of additional tariffs in the US apply to over $ 250 billion in Chinese imports.

But US President Donald Trump has promised to impose 10% additional taxes on the remaining $ 300 billion worth of goods, almost all US imports from China.

As a result, James Daniel, head of the IMF mission in China, believes that "major uncertainties remain" and that "risks are worsening" in China's economic outlook.

Should this increase in tariffs occur in September, an official said Chinese growth would be driven by 0.3 percentage points.

In the event of a downturn, China will need to take major fiscal measures to stabilize the economy.

The IMF is also worried about the wider impact of trade tensions in the Asian region more broadly, on business confidence and trade.

Keep the yuan flexible

On the currency front, as the United States formally accused Beijing this week of "manipulating" the yuan to take it down and make Chinese goods more competitive, the IMF calls for "more transparency" on monetary policy.

Some directors of the fund's board of directors also called on the Chinese authorities to "disclose their intervention" in the foreign exchange market.

The Fund recalls finding "few" interventions by the Chinese National Bank on the foreign exchange market, although the renminbi (another yuan name) depreciated by about 2.50% compared to a basket. currencies, from one year.

He calls on China to "maintain a flexible and market-based exchange rate to absorb tariff shocks."

Should a major depreciation of the Chinese currency occur, accompanied by a potential flight of capital, Beijing must "clearly communicate and possibly intervene in the foreign exchange market to counteract market distortions."

On Monday, the yuan crossed the threshold of 7 yuan to the dollar, its lowest level in a decade. The United States immediately called for currency manipulation.

Treasury Secretary Stephen Mnuchin did indeed formally deny Tuesday on the order of Donald Trump the manipulation of the yuan by China through "specific" foreign exchange market interventions, an interpretation challenged by many economists. He also explained that he had spoken with the IMF on the matter.

As an international monetary institution that monitors Member States' balances of payments, the IMF is indeed the authority to monitor whether Member States engage in competitive devaluations for the artificial pursuit of commercial benefits.

Although the IMF can promote and control bilateral consultations on the issue, it is unclear whether it can impose sanctions.

"We are discussing with the US Treasury Department on a wide range of issues," only Daniel Daniel told the IMF, when asked about the continuation the institution could give to US accusations of manipulating the Chinese currency. (ARM)

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