(Yicai) April 30 -- China “has the girth to take it on the chin and not be hit spectacularly hard” by the new US tariffs, according to Brian Coulton, chief economist at Fitch Ratings.

Citing uncertainties in the global trade outlook, the New York-based credit rating agency recently cut its forecast for world economic growth by 0.4 percentage point, expecting it to come in at less than 2 percent this year. Excluding the period of the pandemic, this would be the slowest pace of growth since 2009.

Below are extracts from Coulton’s interview with Yicai:

Yicai: What leverage or strength does China's economy have in this tariff war?

Brian Coulton: China’s economy is huge and diversified. It's an USD18 trillion economy. Even on the export side, it's pretty diversified. They export as much to Europe as they do to the US. They export huge amounts to other emerging markets. China has been making gains in export market share globally. And they're clearly moving up the value-added chain domestically as well.

At the end of the day, China's exports of goods to the United States -- USD500 billion, depending exactly how you measure it -- it’s 2.75 percent of Chinese GDP. It's not a dominant source of growth on its own by any means. Compare it with countries like Canada or Mexico or Vietnam, where their exports to the US are 20 percent plus of GDP.

So it's not that exposed to the US. And as I say, it's an enormous diversified economy, but does have these domestic challenges, particularly in the construction sector. So it's a difficult time for this shock to come, but I think China kind of has the girth to take it on the chin and not be hit spectacularly hard.

Yicai: Fitch has reduced its forecast for global growth. Is this solely due to the severe escalation of the global trade war?

Coulton: The short answer to that is ‘yes,’ very much so. Normally we do our economic forecasts on a quarterly cycle, and the last one was published in the middle of March. In that forecast, we had assumed that the US tariff rate would rise very significantly. We were more aggressive than the consensus at that stage.

But what's happened in the last three or four weeks has been much more aggressive than we assumed. And particularly with the massive escalation of the US-China trade war, we felt that we just could no longer really defend the forecasts we had published in the middle of March.

So the revisions we made -- the 0.4 percent -- is a very big revision. I mean, this is global GDP we're talking about, this is a USD100 trillion quantum, that’s the amount of flow we’re talking about of economic activity. And it's entirely down to the escalation of the global trade war.

Yicai: Do you think the escalation of the global trade war will trigger an economic recession in the United States?

Coulton: It certainly significantly increases the risk of a US recession. The forecasts we've just published don't show an outright recession in the sort of generally accepted definition of two consecutive negative quarters of growth. We think that growth will remain positive sequentially.

But if you look at our forecasts of growth through the year, so that’s over the course of 2025, so if we look at our forecast for the fourth quarter of 2025, the growth rate from fourth quarter of last year, we've got that slowing to below 0.5 percent. So it's slowing to a crawl.

It's not a recession, but when growth is that weak it doesn't take very much of an additional negative shock to push you into recession territory. So yes, a very substantial increase in the risk of a US recession.

Yicai: The US’ effective tariff rates have risen to 23 percent, as you wrote, the highest level since 1909. If we were to go back over a century ago, what implication could this have for the global economy?

Coulton: It’s kind of hard to sort of overstate the dramatic nature of this move. Basically, since the 1960s, when you had the General Agreement on Tariff and Trade, the US, Europe, and all the world's major economies kind of got together and agreed on the sort of multilateral approach to trade -- we had the development of the WTO.

We've only really seen trade barriers and tariffs go in one direction since the mid-1960s. They’ve been heading down and down. There's the occasional blip in certain sectors -- steel and aluminium every now and again -- but really the broad trend was just for ongoing trade liberalizations. And we reached a point where for many developed countries tariffs had become like an irrelevance, they were so low -- one or two percent, or less than that.

Economists had kind of stopped talking about tariffs. They had become an irrelevance. So the fact that we're going back to the debates that the economists in the Victorian Age in the UK were having between free trade and mercantilism and protecting domestic sectors, is a historic shift.

Yicai: What does this mean for US inflation? Fitch has forecast an increase to 4 percent.

Coulton: There’s been a lot of negative talk from the US authorities about imports. They generally think imports are a bad thing, but at the end of the day, imports are a source of supply for the US economy.

So if you put up massive barriers to imports, supply has got to become more scarce and the dramatic nature of in which it has happened, with these crazy tariff rates of 120 percent and 140 percent, is going to make a lot of trade between the US and China just completely uneconomic.

Over time, maybe the US can find other sources of supply, other countries to provide the goods that are currently provided by China. Maybe they will at some point develop that capacity to produce that stuff domestically, which seems to be the objective of some of the analysis that we are seeing from the US administration.

But those things are going to take a long, long time -- that redirection of imports to other sources or the substitution of imports with domestic production. You're talking about sort of five- 10-year shifts, slow moving shifts, in the economy. So in the near term, you're not going to be able to find alternatives, and that means supply will be more restricted.

We're factoring it quite a significant increase in the price of core consumer goods over the next 12 months as the tariffs kick in.

Yicai: What will happen when the 90-day pause on US tariffs ends? What are the best case and worst case scenarios?

Coulton: It’s quite hard to predict US trade policy at this point. It does sort of feel as if the 10 percent ‘reciprocal tariff’ is a bit of a floor number. It’s probably unlikely that any country's going to be below that.

The difficulty here is that when they set out those Rose Garden tariffs and the rationale for them, it was all about the trade deficit. Well, it's quite hard for a country to promise that its trade surplus with the US is gonna evaporate, right?

If those Nike factories are in Vietnam and they are making shoes, and if they stay there and continue to make shoes, Vietnam will continue to have a surplus with the US. That's just the hard facts of the situation.

It’s not really going to be credible for countries to say ‘We’ll no longer run a trade surplus with the US.’ I don't see how that can really be laid out. Some of them will offer to buy more goods, but I don't know how important that's going to be, particularly for the smaller economies.

There's a good chance that we will get some countries going back to some of the higher reciprocal tariff rates that were announced on ‘Liberation Day.'

Yicai: The US Federal Reserve now faces the challenge of balancing inflation and boosting domestic growth. Will it implement a ‘rescue cut’ by mid-year?

Coulton: It's unlikely. Not because they're going to be any more optimistic than the consensus now is on US growth. I think they will be reducing their growth forecasts. They will be becoming more pessimistic about the US GDP outlook. They'll be more pessimistic about the labor market outlook.

So that would be something that would be pressuring them to ease and ease quite early. But there's the problem of inflation. Even going into this, inflation hasn't come down as far as they would like it to come down. And we've just published a forecast of 4.3 percent.

I expect the fed will be raising their inflation forecasts, which means that they're not achieving their inflation objective.

And then the other factor that I think is very important has been the recent alarming rise in household inflation expectations. This is not just inflation expectations for the next year, this is inflation expectations for the next five years. Those have shot up very sharply in the University of Michigan survey. And we've had two months of this. It wasn’t just a one-off.

And as we know, this is pretty important for the Fed's credibility. If people don't believe the inflation target, then it's going to be very hard for them to get inflation down. That's going to worry them, so a near-term sharp emergency rate cut as the prospects of the economy deteriorate looks quite unlikely.

Yicai: The Fed’s last tightening probably missed the best time to stop higher inflation. Do you think it will be more prudent this time?

Coulton: What was very interesting about one of Chair Powell's recent speeches about how tariffs affect economies, he used the word ‘persistence' two or three times in his comments about how they were thinking about tariffs.

Go back to the episode you were talking about before that they did get behind the curve in 2021. Remember, it was ‘team transitory,’ it’s just a one off shock to the price level. They got that wrong and they admitted that they got that wrong. I think that having been through that experience, that kind of scarred them a little bit.

So it was quite interesting when Powell inserted the word that the risk that the tariff shock has a ‘persistent’ impact on inflation, the word ‘transitory’ was nowhere to be seen. That tells you quite a lot about how worried they are about the potential ongoing inflationary impact of this.

Editor: Tom Litting