(Nov 7): An expanded US-China trade war during President-elect Donald Trump’s second term could slash the Asian nation’s economic growth by two percentage points and prompt Beijing to stimulate domestic demand, according to Macquarie Group Ltd.

Trump’s campaign vow to raise tariffs on Chinese goods to 60% could cause the nation’s exports to decline by about 8% over the following year, Macquarie economists projected in a note on Wednesday. Taking into account the hit to companies’ capital expenditures and business confidence, the impact on gross domestic product (GDP) would be significant, they said.

In that case, policymakers would have to step up policy support for the economy, and 60% tariffs could require three trillion yuan (US$420 billion or RM1.84 trillion) in stimulus to offset, the economists said. Another three trillion yuan would be needed to turn around weak domestic demand, according to their estimates.

“Trade war 2.0 could end China’s ongoing growth model, in which exports and manufacturing have been the main growth driver,” economists Larry Hu and Yuxiao Zhang wrote. “Under the next growth model, domestic demand especially consumption could become the main driver again as it was during the 2010s.”

The US economy would suffer as well.

Bloomberg Economics projects that the maximal version of Trump’s campaign plan, with the China tariffs coming on top of 20% across-the-board tariffs, would lower US GDP by 0.8% and add 4.3% to inflation by 2028 if China alone retaliates. If the rest of the world also retaliates, the blow to growth would be greater, lowering US GDP by 1.3%, but would add just 0.5% to inflation because of the weakened US economy.

In the previous US-China trade war during the first Trump administration, the US raised the effective tariff rate on Chinese exports to 19.3% in early 2020 from 3.1% in early 2018. Some 66% of Chinese goods were subject to additional tariffs as a result, according to Sydney-based Macquarie.

Chinese exporters have since been diversifying their markets and shipping via third countries that then re-export to the US, helping China maintain a stable share of global exports, they wrote. If the US raises tariffs on the rest of the world, this strategy could prove to be more difficult, according to them.

Trump’s campaign vows on trade may also be more of a threat, serving as leverage in negotiations with other countries, including China, after he takes office.

“In reality, the tariff hike may be smaller and narrower than what Trump has floated,” according to the report. “As a result, Beijing may not react pre-emptively, but may decide the size of the stimulus later in response to the actual tariffs.”

A Politburo meeting in December could provide more clues about China’s strategy and potential response, they said.

Exports have played a more significant role in boosting China’s economic growth since the pandemic, when overseas demand for goods surged and officials made efforts to ensure smooth production even during Covid lockdowns. Domestic demand dwindled, however, as households and businesses became increasingly pessimistic under a persistent property downturn. Lay-offs and pay cuts in sectors from finance to tech also weighed on consumption.