Is Trump’s Trade War Going to Cause China to Have a Problem With Inflation?

11th September 2018 Off By binary
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That was one of the items on the list of factors adding to inflationary pressures in China in this NYT article, but it doesn’t seem very plausible. China is on track to import a bit less than $140 billion worth of goods and services from the United States this year. This is less than 1.0 percent of China’s GDP measured at its exchange rate value. (Using a purchasing power parity measure this would be about 0.6 percent.)

Suppose that China’s trade war tariffs add 30 percent to the price of these imports (a very high assumption). This would push up the overall price level by 0.3 percentage points. However, we are continually reminded that much of China’s exports are primarily foreign valued added. Let’s assume that 40 percent of U.S. exports to China end up as value-added in exports either to the U.S. or third countries. This means that the 30 percent rise in price due to tariffs would add 0.18 percentage points to the price level. That is not exactly soaring inflation.

The fact that the yuan has fallen about 6.0 percent against the dollar over the last six months will almost certainly have more impact on China’s inflation rate. The decline in the value of the yuan was not mentioned in the piece.

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