While the broader trade war (10%-20% tariffs on all US imports) will likely be put on hold, tariffs on China are expected to ramp up quickly. The average effective tariff rate on Chinese goods in the 2018-19 trade war was lifted from 3% up to 20%. We now expect this to be expanded to 60% sometime early next year. Based on the 2018-19 episode, the impact should thus be roughly twice in magnitude. This means a 2%-point annualized drag on GDP growth in 1H25, tempered by the 1%ar lift from fiscal policy, noted above. Next week’s November data should begin to show the impact of the fiscal boost on activity (IP +0.5%m/m, retail sales +1%m/m) despite ongoing deflation risks (CPI 0.0%m/m).

Despite China being ground zero for the expected trade war next year, the spillover to the rest of the region could prove large. The China slowdown over the past two years has had a muted impact on the region, owing in part to the shifting of production and transshipments to outside of China. The US now looks likely to be more sensitive to these shifts, potentially extending tariffs to those countries. In this regard, the “beta” of China to the rest of the world could rise. Another channel of spillover is how China will react to the loss of a market for their copious production capacity. The risk is that this capacity is funneled to other parts of the world, raising the risks of more regional trade disputes.