The impact of international trade frictions on the economy and asset allocation

Core Views
 

Overview of the Current Round of International Trade Frictions

Ø At 4:00 a.m. Beijing time on April 3, Trump announced reciprocal tariffs based on the IEEPA (International Emergency Economic Powers Act). An additional 10% benchmark tariff on global imports will take effect at 00:01 Eastern Time on April 5, and the reciprocal tariffs will take effect at 00:01 on April 9. The details are as follows:

(1) A 10% benchmark tariff will be generally imposed on trading partners around the world;

(2) Higher tariffs will be imposed on specific countries, with the tax rates ranging from 10% to 49%;

(3) For China, an additional 34% tariff will be imposed under this reciprocal tariff policy. As of now, the cumulative tariff increase this year is 54%;

(4) The exemption for tariffs on small - value imports (less than $800) has ended.
 

Ø At Beijing time on April 4, China took a series of counter - measures in response to the US reciprocal tariff policy. The details are as follows:

(1) Starting from 12:01 on April 10, 2025, a 34% tariff will be imposed on all imported goods originating from the United States on top of the current applicable tariff rates;

(2) The Ministry of Commerce, together with the General Administration of Customs, issued an announcement on implementing export control measures for seven categories of medium and heavy rare - earth related items such as samarium, gadolinium, terbium, dysprosium, lutetium, scandium, and yttrium, which will be officially implemented as of the date of issuance;

(3) The Ministry of Commerce issued an announcement deciding to include 16 US entities in the export control list, banning the export of dual - use items to them;

(4) The Ministry of Commerce issued an announcement from the working mechanism of the unreliable entity list, deciding to include 11 US enterprises such as Skydio in the unreliable entity list;

(5) The Ministry of Commerce decided to conduct an industrial competitiveness investigation on imported medical CT tubes starting from April 4, 2025, and initiate an anti - dumping investigation on imported related medical CT tubes originating from the United States and India;

(6) Due to inspection and quarantine issues with relevant imported products, the General Administration of Customs decided to suspend the qualification of one US involved enterprise for exporting sorghum to China, the qualification of three US involved enterprises for exporting poultry meat and bone meal to China, and the export of poultry meat products from two US involved enterprises to China.
 

The impact of imposing tariffs on the United States on China's imports and inflation is relatively controllable.

Ø From a total - volume perspective, as of the end of 2024, China's total imports from the United States were approximately $165.2 billion, accounting for about 6.4% of China's total imports. China's dependence on imports from the United States is relatively low. And from a trend perspective, since the first round of China - US trade frictions in 2018, China's share of imports from the United States has gradually decreased. Therefore, the impact of the current round of tariff increases on the United States on China's import side may be relatively controllable.

Ø From a structural perspective, as of the end of 2024, in terms of absolute import value, among the products imported from the United States, the import values of mineral products ($23.1 billion), mechanical equipment ($20.2 billion), electrical equipment ($18.3 billion), precision instruments ($13.1 billion), and plants for production ($12.6 billion) exceeded $10 billion; in terms of import dependence, China has a relatively high dependence on imports of aerospace vehicles from the United States, accounting for more than 50% of China's total imports of aerospace vehicles. The import dependence on printed matter, some animal products, and flammable products such as explosives and fireworks from the United States also exceeds 20%. For key products, China has a relatively high import dependence on passenger cars (19%), freight vehicles (33.5%), sorghum (66.8%), soybeans (22.8%), live pigs (66.9%), and beef (39.8%) from the United States. Overall, after imposing tariffs on the United States, it may have a certain impact on China's imports of agricultural products, aerospace vehicles, automobiles, and high - tech products such as high - end chips. The relatively high dependence on imports from the United States may cause these industries to bear a certain increase in import costs.

Ø In terms of the impact on China: On the one hand, in the short term, it may cause fluctuations in agricultural product prices, but in the medium and long term, the impact on China's inflation is not significant. China's overall import dependence on the United States is relatively low. The areas with relatively high dependence are mainly concentrated in high - tech fields such as aerospace vehicles and high - end chips, which account for a small proportion of China's imports, and the cost is not easily passed on to the consumer end. For primary products such as agricultural products with relatively high dependence, it may be difficult to find new suppliers in the short term, resulting in a price increase. However, the high substitutability means that China can subsequently turn to other countries for import substitution. In the medium and long term, the impact on China's prices is relatively controllable; on the other hand, after the counter - measures against the United States, the process of domestic substitution will be further accelerated. As of the end of 2024, the retail share of domestic - brand passenger cars in China was approximately 65.2%, leaving a large room for improvement. After this round of counter - measures, Chinese automobile manufacturers are expected to gain market space to replace US enterprises, which can also alleviate the over - capacity to a certain extent. In key fields such as semiconductors and integrated circuits, these counter - measures also demonstrate China's determination to increase investment in science and technology and break through the bottleneck technologies in key fields, which is expected to accelerate the process of domestic substitution, and relevant field manufacturers are expected to directly benefit.
 

One of the purposes of the United States' tariff increase is to increase fiscal revenue, and China's counter - tariffs also have the same effect.

Ø Calculated based on the import volume in 2024, theoretically, the fiscal revenue brought by counter - tariffs can reach 400 billion yuan, accounting for 1.8% of the full - year budget revenue in 2025. This amount of funds is equivalent to an increase of 0.3 percentage points in the deficit ratio, making the fiscal funds for stable growth more abundant. In 2024, China's imports from the United States were 1.16 trillion yuan. If calculated at a 34% tariff rate, the tariff revenue will increase by nearly 400 billion yuan. If the counter - tariffs in February are considered, the revenue increase may be even more. In 2025, China's fiscal budget revenue is approximately 22 trillion yuan. The revenue increase brought by counter - tariffs can reach 1.8% of the total fiscal revenue. This amount of funds is equivalent to an increase of 0.3 percentage points in the annual deficit ratio, which can greatly enrich the fiscal policy toolbox, and more resources can be used for domestic stable growth.

Ø Of course, historically, whether the final tariff revenue increases depends on how the tariff rates on non - US countries change. After the previous round of trade wars, China continuously reduced the import tariffs on other countries. For example, in 2018, while raising the import tariffs from the United States reciprocally, China also lowered the import tariffs on other countries. Starting from May 2018, zero tariffs were imposed on most imported drugs. Starting from July, the import tariffs on automobiles, auto parts, and some daily consumer goods were reduced. Starting from November, the tax rates on 1,585 imported goods were reduced again, covering 19% of the total number of imported goods. The average tax rate of these products was reduced from 10.5% to 7.8%, with an average reduction of 26%. After multiple downward adjustments, although the tariffs on some US products were increased, the average tariff rate of all taxable products in China still decreased by nearly a quarter in 2018. The total tariff level decreased from 9.8% in the previous year to 7.5%, and continued to decrease to around 7% at the beginning of 2023.

Ø Therefore, after the previous round of trade wars, China's total tariff revenue did not increase significantly. In 2017, the tariff revenue was 299.8 billion yuan, which decreased to 288.9 billion yuan in 2019 and further decreased to 244.3 billion yuan in 2024. The average tariff rate of all imported products (= tariff revenue / total import volume) also decreased from 2.4% in 2017 to 2% in 2019 and then to 1.3% in 2024.

Will the major asset markets repeat the "liquidity crisis"?

After China's counter - measures were announced, the global stock markets experienced another round of sharp declines after the Thursday drop. In the two trading days of Thursday and Friday, the S&P 500 index fell by more than 10% cumulatively in two days, setting the largest two - day decline since the early stage of the pandemic in March 2020. The Dow Jones Industrial Average and the Nasdaq Composite Index also fell by 9.3% and 11.4% respectively. The average decline of major European indices was between 7% and 8%. The VIX index reached a four - year high. Crude oil, copper, and agricultural products fell sharply, and gold also began to decline rapidly after reaching a historical high.

Referring to the period when the global market was in a liquidity crisis in the early stage of the pandemic outbreak in March 2020, market investors sold off risky assets on a large scale to obtain US dollar liquidity. When gold, as the last reserve of risky assets, was also forced to be sold, we need to be vigilant against the risk of indiscriminate decline transmission caused by the current panic in the market and the risk of passive appreciation of the US dollar.

Different from March 2020, before the "extremely pessimistic" expectation of reciprocal tariff rates is fulfilled and there may be some exemptions when the tariffs are officially implemented on April 9, on the one hand, the current market believes that there is little room for the tariff conditions to further deteriorate. After all parties "show their cards", the short - term future trend may be the game of interests in other fields outside trade between the two sides in the negotiation. On the other hand, compared with the information panic in early March 2020, the current situation can be referenced by the situation in 2018, and the pessimistic expectations have been relatively fully released. In addition, from the perspective of asset prices, it is currently in the early stage of the "liquidity crisis", and the US dollar index is also relatively stable. For the US stock market, the ratio of rising and falling stocks is almost close to 50%/50%, indicating that the decline is more structural rather than a comprehensive decline. Judging from the trading situation of the overseas market on Friday, the decline of the A50 index futures was much smaller than that of the major US stock indices. The decline of the Asian market and Chinese concept stocks on Thursday was also smaller than that of other regions. On the one hand, the trading volume of A50 may be relatively small. On the other hand, it shows that the sentiment in the domestic market is still relatively strong. Therefore, the subsequent market in this round may not develop into the situation in March 2020. We believe that the global market will still be briefly affected by negative emotions. Especially, the on - shore and Hong Kong markets that did not trade during the Tomb - Sweeping Festival need to digest the short - term capital hedging behavior. However, after the short - term emotional release and the implementation of the tariffs on April 9, the market will start to enter the stage of fundamental verification.

How to "hedge risks" in the equity market during the decline?

Ø Since the current round of global reciprocal tariff collection has also led the United States to raise tariff rates on Southeast Asia and Europe, the channels for some companies with a relatively large proportion of overseas revenues to meet US demand through entrepot trade in the future will also be affected. Therefore, we mainly judge the impact on the future fundamentals of industries from the perspective of overseas revenues. From the perspective of primary industries, industries such as household appliances, electronics, and automobiles with a relatively high proportion of overseas revenues need to be avoided. We can consider screening in industries such as real estate, non - banking finance, public utilities, environmental protection, food and beverages, communications, coal, and banking. We further screened the secondary industries with a low proportion of overseas revenues and high future performance growth rates, which are mainly concentrated in the consumer industry. We can pay attention to industries such as medical beauty, education, insurance, liquor, snack foods, and precious metals. We need to avoid companies with a relatively large proportion of overseas revenues in industries such as other household appliances, shipping ports, medical services, diversified finance, lighting equipment, black household appliances, energy metals, optoelectronics, and textile manufacturing. Combining the industry fundamentals and the trading style of the domestic equity market last Thursday, the directions of domestic demand chain/high dividends/tariff exemptions are the mainstream responses of market funds at present. Considering the performance, current valuation, and market trading sentiment, the main hedging directions recently are concentrated in industries such as real estate/consumption/banking/public utilities/agriculture/medicine.
 

Bond Market: The risk - aversion sentiment and loose expectations may push interest rates to challenge previous lows

Ø The US "reciprocal tariff" policy and China's counter - measures against the United States have broken the situation of the bond market's game on the tightness of the capital supply in the first quarter. In addition to the rapid decline of interest rates driven by the rising risk - aversion sentiment, the main line of the bond market game has become "expected increase in external uncertainty factors → decline in external demand → more importance of expanding domestic demand → more active economic policies → opening of the window for loose monetary policy".

Ø When the tariff risk intensifies the downward pressure on imports and exports, more active fiscal policies and "moderately loose" monetary policies may need to be strengthened for hedging. Compared with fiscal policies, monetary policies have higher flexibility. Since the beginning of this year, the long - awaited opportunity for "timely reserve requirement ratio cuts and interest rate cuts" in the bond market may be coming. It is expected that starting from April 7, the game on the economic fundamentals and the rising expectations of loose monetary policies may push interest rates to further challenge previous lows, corresponding to a 10 - year interest rate of 1.60% and a 30 - year interest rate of 1.80%. However, when the short - term capital interest rates still remain at a relatively high level, whether the further decline of long - term interest rates can break through the bottom constraint still needs to verify the attitude of monetary policies and the capital supply: if the central levels of overnight and 7 - day repurchase interest rates significantly decline, it may consolidate the expectations of loose monetary policies, and the lower limit of interest rates may continue to be broken; if the central levels of overnight and 7 - day repurchase interest rates continue the level since March, long - term interest rates may re - enter a narrow - range oscillation.

Renminbi Exchange Rate: Break away from low volatility and pay attention to the guidance of the central parity rate

The successive depreciation of the on - shore and off - shore Renminbi on April 3 was a "knee - jerk reaction" to the impact of risk events, through which market sentiment was released. After the announcement of China's counter - measures against the United States on April 4, the off - shore Renminbi fluctuated following overseas risks and liquidity shocks, with an amplitude of more than 1,000 points in two trading days, breaking the long - standing low - volatility state. Since the central parity rate "restrained" the exchange - rate fluctuation range in the first quarter of 2025, a certain degree of elasticity has been reserved for the impact of external risks in April. On April 3, the central parity rate of the US dollar against the Renminbi was raised to 7.1889, and the "limit - down" of USDCNY was raised to around 7.33, guiding the spot market to fully vent the emotions accumulated by risk events. Next, it is particularly important where the central parity rate of the US dollar against the Renminbi will be set on April 7: If the central parity rate continues to rise above 7.19, aiming to continue guiding the upward revision of the spot exchange rate, then USDCNY may break through the constraint of 7.33, and the spot exchange rate may try to approach around 7.35; if the central parity rate is revised downward compared with the quotation on April 3, indicating that the central parity rate tends to "pull" the spot exchange rate back to the range of 7.21 - 7.31, the Renminbi exchange rate may continue to oscillate within the original fluctuation range.
 

Risk Warnings: The boost of domestic demand falls short of expectations; the