10% Tariff on Chinese Products Brings Relief to Markets Amid Tension

Markets See Relief as Gradual 10% Tariff on Chinese Imports Is Less Severe Than Expected / Reuters

The introduction of a 10% tariff on all Chinese products, while initially sounding like a negative development, has actually provided a sense of relief to the markets. According to Wolfe Research, this is because the situation could have been much worse.

In a recent report, the investment firm stated that despite the rollercoaster-like flow of events earlier this week, the gradual implementation of a 10% tariff on Chinese imports has alleviated market fears. They emphasized that market participants had been concerned about the possibility of a broader trade war, and the relatively restrained tariff measure came as a welcome development.

China’s Retaliatory Measures: A Limited Response to US Tariffs

As soon as the new US tariffs took effect, Beijing swiftly responded by imposing tariffs on American products. These measures included a 15% tariff on US coal and liquefied natural gas, a 10% tariff on crude oil, agricultural machinery, and some automobiles. However, these tariffs are set to take effect only by February 10, with an estimated total impact of less than $30 billion.

Wolfe Research pointed out that market participants were concerned about the possibility of an escalating trade conflict. There were also concerns about the potential for additional tariffs on imports from Canada and Mexico. However, strategist Stephanie Roth and her team at Wolfe Research indicated that the likelihood of broad tariffs being implemented across the board is low through the end of the year. This is because the US government likely requires tariff revenue to meet funding needs for the Tax Cuts and Jobs Act (TCJA) until the year’s end.

Economic Impact of the Tariffs: Modest Effects Predicted

From an economic standpoint, the 10% tariff on Chinese goods is expected to have a relatively limited impact. Wolfe Research forecasts that this tariff will put downward pressure on GDP growth by 14 basis points and have a modest inflationary effect, raising inflation by 12 basis points.

In contrast, if tariffs of 25% were imposed on non-energy imports from Mexico and Canada, along with a 10% tariff on Canadian energy resources, the economic impact would be much more significant. Wolfe Research projected that such measures could reduce GDP growth by as much as one percentage point and increase inflation by 66 basis points.

Despite these developments, Wolfe Research has not adjusted its forecast for the US economy. The firm continues to predict that the US economy will grow at a "trend-beating" 2.2% this year, with inflation remaining relatively stable at 2.3%.

Future Outlook: Tariffs as a Tool for Negotiation and Potential Expansion

Wolfe Research anticipates that tariffs will continue to be used as a tool for negotiations through the first half of this year. However, they also noted that if additional funding is needed later in 2025, there is a risk that tariffs could be expanded. Despite the current situation, the markets are finding comfort in the fact that the worst-case scenario has not yet unfolded.

Strategists have noted that while discussions surrounding the potential imposition of tariffs on Canada and Mexico will continue for the next month, the likelihood of these countries becoming the primary victims of a trade war remains low. Canada, in particular, is expected to bear less of an impact due to relatively low numbers of border enforcement issues and fentanyl seizures.

Meanwhile, the tariffs on China are viewed as part of a broader strategy by former President Trump, who may seek to escalate or maintain these measures as part of his long-term approach to trade relations.