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The announcement by the United States to increase tariffs on imports from Canada, Mexico, and China has prompted financial analysts at UBS to evaluate the potential economic consequences.
The US has declared a 25% tariff on Canadian and Mexican imports, with the exception of a 10% tariff on energy imports from Canada, and a 10% hike on Chinese goods, starting from February 4.
These measures are in response to issues including Fentanyl control for China. The US imports from these nations constitute approximately 45% of its total merchandise imports and 5% of its GDP.
In a scenario where the tariffs remain in place with minimal retaliation and limited absorption of costs by exporters, UBS’s global team anticipates a reduction in US GDP growth by 0.8 percentage points.
Additionally, the firm predicts that US PCE inflation could rise by 0.4 percentage points by the end of 2025, although this forecast is subject to considerable uncertainty, particularly with regard to potential changes in exchange rates. The added 10% tariff on China could further drag US GDP down by 0.1 to 0.2 percentage points.
The repercussions for China’s economy could also be significant. UBS estimates that the 10% tariff, if maintained, could decrease China’s GDP growth by 0.3 to 0.4 percentage points through diminished exports and subsequent weaker investment and consumption.
The slowdown in US and North American growth may exert additional pressure on China’s exports and economy. Furthermore, China’s inflation might be negatively affected by about 0.2 percentage points. These projections are based on the impact of prior US tariff increases in 2018-19 and assume limited retaliation from China.
Despite these recent developments, UBS has decided not to alter its baseline forecast for China, which predicts a GDP growth rate of 4.0% in 2025. This forecast includes the anticipation of US imposing a 60% tariff on a quarter of China’s exports in the third quarter of 2025, with the possibility of further tariffs in 2026.
UBS expects that while the quarterly growth profile for China may vary, the overall 2025 growth forecast remains unchanged due to the likelihood of additional US tariffs and increased policy support from the Chinese government.
The firm also anticipates that the Chinese Renminbi (RMB) will face modest depreciation through 2025 as a result of the new tariffs. After appreciating in late January, the latest tariff hike is expected to put the RMB under renewed depreciation pressure.
UBS maintains its end-2025 USD/CNY forecast at 7.6, reflecting the belief that China will not actively devalue the RMB in response to tariff hikes but will seek to manage the depreciation pace for financial stability.
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