US’ average tariff rate likely to quadruple in 2018 compared to 2016 if Trump raises tariff to USD500 bln on China

The United States’ average tariff rate would more than quadruple in 2018, compared to the rate in 2016 if President Donald Trump is ready to increase the tariff to USD500 billion on China, and if the auto and parts tariffs are introduced later this year, according to the latest report from ANZ Research.

Rising trade frictions have been captivating the media and markets for most of 2018. Despite the intense focus, hard economic data has yet to show any real impact. A key question for investors is whether a more hostile trade climate will affect the expected monetary policy outlook in the U.S. and abroad.

Following the passage of US tax reforms last year, Washington’s economic policy focus has been on trade. Since November 2017, it has implemented six rounds of tariffs, totaling USD106 billion in goods imports, through July 2018. The majority of these have been levied against China (Round 1 USD34 billion; Round 2 USD16 billion, pending).

Tariffs also include the broader steel (USD23 billion) and aluminium (USD16 billion) levies. In isolation, this is a relatively small component of the USD2.34 trillion in annual imports (2017). However, if trade tensions escalate, this could be just the tip of the iceberg, with Washington threatening tariffs that would cover an additional USD785 billion worth of imported goods.

The Trump administration is currently taking public comment on 10 percent tariffs covering an additional USD200bn of Chinese imports, and measures could be implemented in September. In addition, President Trump recently acknowledged the US is ready to raise tariffs on a further USD250 billion of Chinese imports, covering all USD505 billion worth of goods imports from China. Although the timing of the latter is uncertain, they could come into effect in November. That would mirror the two-month gap between the first USD50 billion and USD200 billion currently under review.

Aside from the direct tariffs against China, the US Department of Commerce initiated a Section 232 investigation against autos (USD192 billion) and parts (USD143 billion) imports in late May. Assuming the Commerce Department fast tracks the investigation to six months instead of the nine months for steel and aluminium, the US could have imposed tariffs on USD890 billion worth of imports by the end of the year, the report added.