Increasing tariffs on China will likely hurt US growth, says Nomura

A shipping container is offloaded at the Port of Oakland in Oakland, California.

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Raising tariffs on all Chinese goods that enter American borders will likely hurt U.S. economic growth, which has already shown signs of slowing in recent months, according to Japanese financial firm Nomura.

President Donald Trump has claimed on several occasions that the U.S. has collected billions of dollars in tariffs paid by the Chinese, which partly contributed to the strong American economy. But Nomura's chief U.S. economist, Lewis Alexander, said on Tuesday that the net impact of the tariff fight is likely negative for the America.

Tensions between the U.S. and China escalated earlier this month, when Trump announced an increase in tariffs on $200 billion of Chinese goods from 10% to 25%. He also threatened to apply 25% tariffs on the remaining imports from China worth around $300 billion.

Beijing retaliated by raising levies on $60 billion worth of American products.

Alexander said there's evidence that tariffs collected by U.S. government are being paid by American firms and consumers, rather than the Chinese. "And frankly, on net, it's likely to be a drag on U.S. growth rather than neutral," he told CNBC at the Nomura Investment Forum Asia in Singapore.

The continued tariff fight between the U.S. and China — the world's two largest economies — come at a time when the American economy is "clearly slowing," the economist said. He added that "the biggest thing" that will affect U.S. economic growth and decisions by the Federal Reserve is how trade developments affect business confidence and investments in the coming months.

Fed to stay on hold

Still, the potential hits to the U.S. economy don't justify a rate cut by the Fed, according to Alexander. He explained that if the U.S. moves ahead to impose 25% tariffs on all Chinese goods, core inflation in America could tick up by 0.5 percentage point over the next 12 months.

Central banks globally typically cut interest rates to stimulate economic activity and stoke inflation. Lowering rates while inflation is inching up puts an economy at risk of overheating, which is often a precursor to a painful downturn.

Alexander is not the only one expecting the Fed to keep interest rates steady. Carmen Reinhart, a professor at the Harvard Kennedy School, also said the U.S. central bank is right to stay patient in making any interest rate movements.

"We cannot lose sight that the U.S. unemployment rate is the lowest since the 60s, the economy — by any metric — is still operating close to full employment," Reinhart told CNBC on Tuesday at the Nomura forum.

"The Fed's wait-and-see attitude is really on the mark," she added.

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