HSBC On US China Tariff Announcement

The bank doesn't expect a significant escalation from China in response to the US tariff announcement. See below for more details.

HSBC: "The Biden administration has completed the statutory four-year review of US Section 301 tariffs applied against China - which were first introduced by the Trump administration starting in 2018. As a result of the review, it will retain existing Section 301 tariffs and will raise duties on USD18bn worth of imports from China (4% of total) over 2024-26. Notably, the Biden administration will quadruple existing additional tariffs on Chinese EVs to 100%, double duties on semiconductors and certain solar products to 50%, and increase additional tariffs on lithium-ion batteries to 25% (from 7.5%). Additional tariffs on steel and aluminium will increase to 25% (from 0% to 7.5% currently). The first tranche of higher duties is expected to take effect in August (date TBC) and some machinery used in domestic production (namely for solar manufacturing) could be excluded.

Overall, we think the latest actions are more symbolic than substantial given that nearly all these products were already subject to additional US tariffs and, aside from lithium-ion batteries, China's trade exposure to the US in other sectors subject to higher tariffs is relatively limited. For example, Chinese EVs exports to the US are negligible given these currently attract high tariffs of 27.5%, while Chinese solar products are largely traded through other Asian markets to the US, and just 2.5% of US steel and aluminium import volumes are sourced directly from China. Therefore, it is likely that these actions were primarily designed to shelter strategic US industries (e.g. autos) from a potential flood of cheaper Chinese products down the line, without escalating tensions massively with China and ahead of the US election this year.

China has said it will take measures to defend its rights and interests but our base case is that China will not retaliate in a significantly escalatory manner, given the limited direct impact on its exports. However, even a 'symbolic' retaliation (e.g. higher duties on already-tariffed goods) risks leading to a further escalation in bilateral trade tensions.

FX: This tariff announcement probably does not warrant a notable FX policy response. Given the small scope, our estimate of a "theoretical" rise in USD-RMB to mitigate the impact is quite modest. That said, this is the latest development in a long list of factors that are putting upward pressure on USD-RMB. Our base case is RMB stability with the help of FX policy, but the challenges are clearly mounting."