Zhong Jin: "How does 'equal tariffs' affect the global market?"

On the early morning of April 3rd Beijing time, President Trump of the United States announced the "Reciprocal Tariffs" plan ("Reciprocal Tariffs" plan) that greatly exceeded market expectations, leading to severe market volatility worldwide. The US stock market plummeted over 5% for two consecutive days, with the VIX index skyrocketing to over 45, marking the most extreme situation since the beginning of the pandemic in early 2020. Moreover, crude oil, gold, and the US dollar also experienced significant drops, with only US bonds providing some hedging effect, but they also dropped last Friday, indicating signs of a liquidity shock of "cash is king, sell all assets." It is evident that the impact of "Reciprocal Tariffs" will not only affect short-term market sentiment and investor confidence in the existing global order, but it will also impact US growth, inflation, and policy paths, as well as the economic and financial conditions of the countries subjected to the tariffs, which in turn will further reflect on global markets and assets. Chart: Global asset volatility intensified after the announcement of "Reciprocal Tariffs," with crude oil (-12%), US tech giants (-12%), and US-listed Chinese companies (-11%) leading the decline. Sources: Bloomberg, FactSet, CICC Research Department With global markets and various assets experiencing heightened volatility, has the impact of reciprocal tariffs been fully reflected at this point? Apart from emotions, how significant are the impacts on growth, profitability, and liquidity, and is it a good time to buy low? In this article, we will focus on analyzing the impact path and quantitative measurement of "Reciprocal Tariffs" on global markets. Basic information on tariffs: greatly exceeding expectations, the effective tax rate in the US may rise above 23%; China's retaliatory measures are stronger than those of the EU and Canada This time, the "Reciprocal Tariffs" greatly exceeded expectations, mainly in the following aspects: 1) broad coverage, with a 10% baseline tariff imposed on all trading partners; 2) high magnitude, with value-added tax and other non-tariff trade barriers making the tax rate much higher than expected alongside the simple tariff reciprocity forecast; 3) canceling exemptions for small parcels and other industry tariffs. It specifically includes the following: The US will impose a 10% baseline tariff on all trading partners starting from April 5th, excluding industries such as steel, aluminum, and automobiles that were already subject to a 25% tariff. Additionally, copper, pharmaceuticals, semiconductors, lumber, and some essential metals and energy products are also excluded. Since April 9th, countries with larger trade deficits will face "Reciprocal Tariffs," with the imposition of higher tax rates exceeding previous expectations of value-added tax reciprocity when considering non-tariff barriers. Higher rates will be applied to Vietnam (46%), Thailand (36%), Mainland China and Hong Kong (34%), Taiwan (32%), South Korea (25%), Japan (24%), and the EU (20%). Moreover, exemptions for parcels under $800 will be removed starting from May 2nd. Mexico and Canada will continue to be exempt under the US-Mexico-Canada trade agreement (UCMA) framework. However, for goods outside the UCMA framework, an additional 25% tariff will be levied under existing fentanyl/immigration International Emergency Economic Powers Act (IEEPA) orders. If the fentanyl/immigration IEEPA orders are terminated, the additional tariff will decrease from 25% to 12%. The 25% auto tariff came into effect on April 2nd, imposing a 25% tariff on imported cars and some car components that do not comply with the UCMA framework, applicable to passenger cars, light trucks, and key car components (engines, transmissions, etc.). According to the Tax Foundation's calculations, this will cover over $430 billion in goods. Chart: Overview of Trump's tariff policies since taking office Sources: White House, CICC Research Department How will tariffs achieve reciprocity? According to calculation methods published by the USTR, (US trade deficit with another country) = (tariff change * price elasticity of import demand * tariff transmission coefficient of import prices * US imports from the other country). Setting the price elasticity of import demand at 4 and the tariff-to-price transmission coefficient at 0.25, the simplified formula can be derived as follows: US tariff rate on a country = US deficit with that country / total US imports from that country, to estimate the reciprocal level needed to balance bilateral trade. How high will the effective tax rate rise? Before the "Reciprocal Tariffs," the effective tax rate had already increased from 2.3% to 5.7%. After the announcement of "Reciprocal Tariffs," we estimate that the effective tax rate will further rise above 23%, reaching a new high in the past hundred years: Chart: The effective tax rate may rise further above 23% after the announcement of "Reciprocal Tariffs." Sources: Haver, White House, CICC Research Department Chart: After the announcement of "Reciprocal Tariffs," we estimate that the effective tax rate may rise above 23%, reaching a new high in the past hundred years. Sources: Haver, CICC Research Department Before "Reciprocal Tariffs," the effective tax rate in the US had already increased from 2.3% to 5.7%. 1) Additional tariffs of 10% were imposed on goods from China in February and March under the International Emergency Economic Powers Act (IEEPA) twice. Imports from China accounted for 12.2% of total US imports in 2024, and our static calculations may raise the US weighted average tax rate by 2.7ppt. 2) The 25% steel and aluminum tariffs that took effect on March 12th may raise the US weighted average tax rate by 0.7ppt. After "Reciprocal Tariffs," the effective tax rate will further rise above 23%. 1) The 25% auto tariff is expected to push up the effective tax rate by 2-3ppt; 2) the 25% tariffs on goods outside the US-Canada-Mexico Agreement may raise the effective tax rate by 3.5-3.7ppt; 3) Reciprocal tariffs are expected to increase by 12-18ppt. Based on the current effective tax rates between the US and major trading partners, we estimate that "Reciprocal Tariffs" may raise the effective tax rate by 18ppt the most, but if excluding imports of cars, steel, aluminum, copper, pharmaceuticals, etc., the actual impact may be around 12ppt. Chart: Based on the estimated effective tax rates of the US on trading partners, we estimate that "Reciprocal Tariffs" may raise the effective tax rate by up to 18ppt. Sources: Haver, White House, Reuters, CICCResearch Department; As of April 5, 2025Implementation and Follow-up Progress of Tariffs. The baseline tariffs took effect on April 5th, and higher "equal tariffs" will be effective on April 9th. Subsequently, if the countries subject to the tariffs reach agreements through negotiations, or if there is a possibility of reduction. Finance Minister Benson reported to congressmen on April 1st that the tariffs on April 2nd will be the "ceiling", aimed at leaving negotiation space for countries to lower actual tariff levels. As of April 5th, some countries subject to the tariffs, such as Singapore, Malaysia, South Africa, etc., have stated that they are seeking negotiations with the United States or not seeking retaliatory tariffs. Vietnam has expressed willingness to reduce tariffs on U.S. imports to 0%. Among the countries implementing countermeasures, China, Canada, and the EU account for 7%, 17%, and 18% of the total U.S. exports, respectively. China announced countermeasures on April 4th, imposing a 34% tariff on all U.S. goods, exceeding the scope and intensity of previous measures. The EU announced countermeasures on March 12th, stating that it will impose tariffs on goods worth 260 billion euros (approximately 280 billion dollars). Based on the current levels of countermeasures, the tariff impacts of China, Canada, and the EU may be around 53 billion dollars, 40 billion dollars, and 7.1 billion dollars, respectively. Impact on the United States: Short-term emotional shock, medium-term stagflation pressure, long-term impact on confidence; downward pressure on U.S. treasury bonds, rapid contraction of U.S. stock valuations, pressure on the U.S. dollar The impact of the higher-than-expected "equal tariffs" on the U.S. economy and U.S. assets is multifaceted, and can be summarized in three dimensions of short-term, medium-term, and long-term impacts: In the short term, there is a direct impact on sentiment, leading to safe-haven trades, and even liquidity shocks. This has been evident in the market's large declines over the past two days. Investors, faced with tremendous uncertainty, tend to reduce positions, especially for those with higher profits, which explains why the Nasdaq and tech stocks have seen larger declines. Additionally, as various assets continue to decline, it is important to pay attention to the "secondary harm" that the decline itself may cause, such as additional margin calls, risk management requirements for closures, or even liquidations. On Friday, in addition to the rise in the dollar, U.S. stocks, gold, and U.S. treasuries all fell, indicating early signs of liquidity risks, suggesting that investors are "abandoning" all assets in favor of cash. However, based on various liquidity indicators, aside from the surge in the VIX, there has not been a significant increase in SOFR-OIS spread, commercial paper spreads, credit spreads, or exchange rate swaps, suggesting that there is still a significant distance from the crises seen in many previous instances. Medium-term increase in economic stagflation pressure, or dragging growth down by about 0.7 percentage points, pushing inflation up by 1.5-2 percentage points. 1) According to calculations by PIIE, a 10% baseline tariff plus a 60% tariff on China, combined, could drag down the U.S. GDP by about 0.42 percentage points by 2025; Based on calculations by the Tax Foundation, adding steel, aluminum, car tariffs, and non-U.S.-Canada-Mexico tariff policies, could drag down the U.S. GDP by about 0.7 percentage points by 2025, but the actual impact will depend on how much the tariff negotiations and tax reduction policies can offset. In a budget resolution passed by the Senate on April 5th, there is over $5 trillion in tax reduction, while there is still disagreement with the $4.5 trillion reserved for tax reductions in the House's budget framework. 2) The sudden increase in tariffs will increase inflationary pressures on the supply side of the U.S. economy. According to previous calculations by PIIE, just a 10% global baseline tariff plus a 60% tariff on China, combined with countermeasures, could increase U.S. inflation by almost 2 percentage points by 2025; According to research by the San Francisco Fed, imports account for about 6.4% of the PCE for goods, so if effective tariffs increase by 20-28 percentage points, it could push up PCE prices by 1.3-1.8 percentage points. Combining both methods, the current tariff policies may push inflation up by 1.5-2 percentage points, causing U.S. inflation to reach 4-5% by the end of the year (our model predicts CPI to be 2.6-3.1% this year). If tariffs maintain this intensity, the Fed will find it difficult to cut interest rates this year, increasing the risk of recession or stagflation (the current benchmark interest rate is 4.25-4.5%), and will have to helplessly watch growth slow down, which will hinder the transmission path to offset growth pressures by lowering rates, a major issue caused by tariffs (similar to 2022). Long-term impact on policy and global order confidence. In both "The Two Accounts of China and the United States" and "The Core of the American 'Exceptionalism' and 'Rising East, Falling West'," we have mentioned that for the past three years, three macro pillars support the United States and the U.S. stock market, including large fiscal spending and AI, as well as a steady influx of global funds for rebalancing. However, the arbitrariness and even destructiveness of policies will increase market concerns about the long-term confidence in U.S. policies, which could lead to an outflow of funds and a weaker dollar.Haver, Wind, CICC Research DepartmentUS Treasury: Short-term risk aversion sentiment drives interest rates down, but this logic will be constrained by stagflation risks and the postponement of Fed rate cuts. After the announcement of "equivalent tariffs," the 10-year US Treasury rate fell from 4.17% to 4.0% (lowest touching 3.86%). 1) Inflation expectations rather than actual interest rates are the main driving factors, with actual interest rates dragging by 3.2bp, and inflation expectations falling by 14.2bp, indicating that growth is not the main concern; 2) Interest rate expectations rather than term premiums are the main driving factors, with interest rate expectations falling by 9.4bp, term premiums falling by 1.3bp, concerns about growth once again driving expectations of rate cuts, with CME rate futures implying a close to 100% probability of a rate cut in June (63.9% probability of a 25bp rate cut, 30.6% probability of a 50bp rate cut). However, Powell stated that the Fed will focus on containing inflation, and if the market gradually realizes that the likelihood of a rate cut in June is unlikely, this could constrain the downward space. If inflation continues to rise as mentioned above, there is limited downward space for interest rates, and in extreme cases, the Fed may refrain from action this year. We expect the US Treasury rate to correspond to 4.2%-4.5% (10-year US Treasury rate expectation 3.9~4%, plus term premiums of 30~50bp, corresponding to US Treasury rates of 4.2~4.5%). Therefore, the progress of subsequent tariff negotiations and countermeasures will be crucial. The current extent of tariff increases may not necessarily be the final result, and a significant shift to "zero tariffs" for some countries cannot be ruled out. Graph: If inflation continues to rise as mentioned above, in extreme cases the Fed may refrain from action this year, with US Treasury rates corresponding to 4.2%-4.5%. Data source: Bloomberg, CICC Research Department US stocks: Short-term risk premiums are greatly impacted, with NASDAQ valuation falling to around 20 times earnings, offering some attractiveness. The degree of profit revision depends on tariffs. Since April 2, the US stock market has experienced two consecutive days of more than 5% decline, with the increase in risk premiums being the main reason. The risk premium of the S&P 500 index has reached a new high of 1.5% since June 2023. If compared to the peak of 2.7% in 2022, this corresponds to a dynamic valuation of around 15-16 times earnings (currently 18.3 times); on the other hand, tech stocks are relatively well-positioned, with the NASDAQ index risk premium of 0.6% closer to the low valuation of 1% in 2022, corresponding to a dynamic valuation of 20 times earnings, offering around 8% downside from the current 21.8 times. Profit expectations have slightly decreased this week, with the 2025 profit growth rate of the S&P 500 and NASDAQ index falling from 11.8% and 22.2% to 11.6% and 21.9%, respectively. The extent of profit decline depends on the final outcome of tariffs, considering current retaliatory measures, we estimate the 2025 profit growth rate may decrease from the previous 10% to 5-6%. Graph: NASDAQ index risk premium of 0.6% is close to the low valuation of 1% in 2022. Data source: Bloomberg, CICC Research Department Graph: 2025 profit growth rate of NASDAQ index fell from 22.2% to 21.9% this week. Data source: FactSet, CICC Research Department USD: Long-term policy confidence leads to capital outflows, with the USD under pressure as a result. EPFR shows that overseas equity funds experienced two weeks of outflows in early March, but have been flowing into US stocks for the second consecutive week, with passive funds slowing down this week and active funds accelerating their influx. Short-term liquidity shocks and investor preference for cash may support the USD, but if investor confidence in policy and growth cannot be reversed, it will be difficult to maintain strength in the long term. Graph: EPFR shows that overseas equity funds experienced two weeks of outflows in early March, but have been flowing into US stocks for the second consecutive week. Data source: EPFR, CICC Research Department Impact on the Chinese market: The need for fiscal stimulus increases; short-term volatility may present re-entry opportunities The additional 34% tariff imposition in the "equivalent tariffs," combined with the previous 20% imposed on fentanyl, raises the total tariff to 54%. If added to the 20% from Trump's first term, the total tariff would reach 74%. Overall, this round of equivalent tariffs and China's retaliatory measures have exceeded expectations, coupled with global market turmoil, which is likely to bring short-term fluctuations. However, if fiscal stimulus increases after the volatility, this could also provide re-entry opportunities. The impact of equivalent tariffs on China? Overall economic impact is likely. With a 54% tariff increase, combined with the cancellation of the exemption for small parcels under $800, the impact of other countries' equivalent tariffs on transit trade, and the impact of previous tariff increases on steel, aluminum, and automobiles, the overall increase in tariffs could reach 55-60%. If we assume a price elasticity of 0.8-1 based on the previous US-China trade friction, this could lead to a 45-60% decrease in China's total exports to the US, considering that China's exports to the US account for about 15% of total exports. China's total exports could decrease by 7-9%, with exports accounting for nearly 20% of GDP, indicating a potential impact on the overall economy. On the market side, it may affect sentiment and profits, with sectors such as home appliances, electronic equipment, and shipping being particularly exposed; sentiment in the Hong Kong stock market may be greatly affected, but the impact on profits may be less significant. 1) Corporate profits: This week, the Hang Seng Index and MSCI China Index's 2025 EPS expectations decreased by 1.3% and 0.3%, respectively. We estimate that a 0.5 percentage point decrease in net profit margin, a 0.2 percentage point decrease in 2024, and potential negative revenue growth could lead to a decrease in the expected 2025 profit growth rate in the Hong Kong stock market from 4-5% to negative growth. Whether this will further decline will depend on the intensity and speed of policy adjustments. In terms of sectors, those with higher revenue exposure to the US such as home appliances, electronic equipment, and shipping may be more affected. Compared to A-shares, Hang Seng Index constituents have a lower percentage of revenue from the US at 3.2%, compared to 5.0% for the Shanghai and Shenzhen 300, and rely less on new economy sectors that are less affected by external factors. Therefore, the impact of tariff hikes on profits in the Hong Kong stock market may be relatively minor. 2) Market sentiment: Short-term market sentiment is disrupted, with the Hang Seng Index risk premium rising to around 6.5% after the announcement of equivalent tariffs. During the previous US-China trade friction escalation, the Hang Seng Index risk premium reached 7.7%, corresponding to a Hang Seng Index around 20,500 (excluding the impact of profit downgrades). If policy responses are positive and the trend in AI technology strengthens, there will be opportunities for intervention. --- Note: The translation has been edited for clarity and coherence.Provide a certain level of hedging.Capital flow: Since the beginning of the year, DeepSeek has brought enthusiasm for the revaluation of Chinese assets, and trading and passive funds have temporarily returned. However, with no significant improvement in fundamentals, active foreign investment has flowed out of the Chinese stock market by a cumulative $5.28 billion so far this year. External uncertainty will continue to lower foreign investment exposure. However, considering that the overall allocation of global foreign investment to Chinese stocks is currently underweighted by 1.2 percentage points, and the overall allocation has decreased from a high of 14.6% in October 2020 to the current 6.5%, unless the United States imposes more financial investment-related restrictions on China, the pressure for significant outflows of foreign investment is not great. Chart: Currently, foreign investment in Chinese stocks is underweighted by 1.2 percentage points, with the overall allocation decreasing from a high of 14.6% in October 2020 to the current 6.5%. Data source: EPFR, CICC Research Department How to hedge policies, and what scale is needed? We calculate that to offset the drag on GDP, the deficit rate needs to be raised or the Renminbi depreciated. Since the shift in policy in September 2024, private sector leverage has stabilized, but sustainability still needs to be consolidated. Although the AI boom led by DeepSeek has brought new growth points, it will take time and space to fully address the issue of deleveraging in the overall private sector. Therefore, fiscal intervention is needed. If the United States unexpectedly imposes tariffs on China again, the importance of fiscal hedging will be highlighted. Historically, when exports are weak, policies are strengthened, providing downside protection in the event of economic slowdown. Specifically: 1) Fiscal supplementation: With a 55-60% increase in tariff rates, offsetting the drag on GDP from exports may require a 1.5%-2% increase in the deficit rate. 2) Exchange rate hedging: Currently, the situation may require a 6.5%-10% depreciation in the Renminbi to hedge. 3) Corporate expansion overseas: The recent US tariffs on China have raised concerns about transit trade, and in the long term, reliance on corporate expansion overseas is still needed to alleviate trade imbalances. Similar to Japanese companies seeking a "second growth curve" overseas in the 1990s, this may help companies break through tariff and supply chain restructuring from the bottom up. How to judge market trends? Short-term volatility may provide re-entry opportunities. We have previously pointed out that the market's rise since the Spring Festival has mainly relied on narrative-driven emotions and improved risk premiums, requiring continuous catalysts from the technology sector. The Hang Seng Index has already priced in expectations within the 23,000-24,000 range and chasing at high levels is not recommended. Therefore, volatility and even a correction are not unexpected, consistent with our continuous assessment ("How far has the revaluation of Chinese assets gone?"). In the short term, external turmoil will intensify, and market pressure from emotional impact is inevitable, especially for the technology sector, which had many profits earlier. During the last round of escalating US-China trade friction, the Hang Seng Index risk premium reached 7.7%, corresponding to around 20,500 (excluding the drag from profit downgrades), with subsequent performance influenced by policy developments. Therefore, the internal demand hedging strength and speed are now more important. If the internal demand hedging strength is strong, it can also provide good re-entry opportunities. Chart: During the last round of escalating US-China trade friction, the Hang Seng Index risk premium reached 7.7%, corresponding to around 20,500 under current EPS and risk-free interest rates. Data source: EPFR, FactSet, PIIE, Wind, Bloomberg, CICC Research Department In terms of allocation, switch to dividend assets in the short term, and switch back to technology after adjustment, with technology remaining the main theme in the medium to long term, requiring fiscal support for broad consumer products. 1) For the technology sector, segments with more profits may face greater pressure under emotional impact, but considering the long-term trends of the technology industry and limited direct exposure, technology is still the main theme, and re-entry may be possible after a certain period of adjustment. 2) For other consumer and cyclical sectors, they depend more on macro policies and overall leverage restoration. If fiscal measures can provide hedging, cyclical sectors related to internal demand will have better opportunities. 3) In addition, sectors related to exports have a greater exposure, including appliances, electronic equipment, and shipping, which are more affected due to higher income dependence on the United States. Impact on emerging markets: Vietnam, Thailand, and South Korea, with a high exposure to the US, are more affected; focus on outflows of funds and exchange rate risks. From the perspective of exposure to the US and the current equivalent tariff rates, Vietnam, Taiwan, Thailand, South Korea, and India are most affected by the current equivalent tariffs. 1) Looking at exposure to the US, Vietnam (27.8%), Israel (27.7%), and Taiwan (23.0%) have the highest proportions of exports to the US as a percentage of total exports by 2024, while Saudi Arabia (4.8%) and Indonesia (7.9%) have relatively smaller exposure, making them more resilient to the external demand impact of tariffs. 2) In terms of equivalent tariff rates, Vietnam (46%), Thailand (36%), Taiwan, and Indonesia (both 32%) have the highest rates among Asian economies, while Argentina, Brazil, and Saudi Arabia uniformly impose a baseline tariff of 10%. Considering these two dimensions, Vietnam, Taiwan, Thailand, South Korea, and India are most impacted by the current equivalent tariffs, which may also lead these economies to negotiate lower tariffs with the US in exchange for exemptions. Aside from external risks from tariffs, internal issues such as economic fundamentals (short-term growth, inflation) and the ability to withstand external risks (foreign reserves, current accounts, fiscal conditions) are more likely the root causes of risks and will determine the future direction of emerging markets. From the perspective of economic fundamentals, according to IMF forecasts, Brazil, Indonesia, and other economies show strong growth and manageable inflation pressures by 2025, while Malaysia, South Korea, and others have relatively weaker growth and smaller expected interest rate cuts in the next year, facing more substantial pressure on economic fundamentals. In terms of the ability to withstand external risks, countries like Turkey, Chile, and Colombia face dual deficits in current accounts and fiscal accounts, and rely on external financing, indicating high external debt ratios in 2024 but insufficient foreign reserves. This raises the risk of default and highlights their vulnerability as emerging markets.The Philippines, Brazil, India and other economies are under significant pressure.Data sources: Bloomberg, Haver, CICC Research Department Charts: Looking at the external debt ratio and foreign exchange reserves to short-term external debt coverage ratio, countries such as Chile, Malaysia, and Argentina have a higher risk of default Data sources: Haver, IMF, CICC Research Department Taking into account the fundamentals, default risks, policy efforts, and the impact of tariffs, our scoring table for emerging markets shows that Thailand, South Korea, India, and Vietnam may be the key risk points to focus on. The current impact of tariffs is still concentrated in the indiscriminate hedging stage, but it is increasingly transmitted to emerging markets through investor sentiment. Looking ahead, attention should be paid to capital outflows and currency devaluation in emerging economies, especially the potential risks in the aforementioned "vulnerable areas." Charts: Considering the fundamentals, default risks, policy efforts, and the impact of tariffs, countries such as Thailand, South Korea, India, and Vietnam show relatively poor performance Data sources: IMF, Haver, IIF, CICC Research Department This article is reprinted from the WeChat public account "Zhongjin Dianjing," authored by Liu Gang, Yang Xuanting, etc.; GMTEight Editor: Xu Wenqiang.