News in Charts: A global trade war remains an outside risk, despite US tariffs

The decision by the Trump administration to put tariffs on imports from China has sent share prices tumbling across the world, as fears over a trade war have risen. A global trade war would have serious, negative consequences for the global economy, but this remains an outside risk in our opinion. It remains to be seen how China will react to the US President’s move, but there are several reasons that we do not anticipate a sharp decline in global trade in response to the announced tariffs.

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First, China’s response has been limited so far. When it was announced that the US would impose tariffs on Chinese imports on Thursday, China responded by suggesting that it would consider putting tariffs on US imports worth up to US$3 billion per year. That is small relative to the value of Chinese goods that will be subject to US import tariffs (up to the value of US$60 billion per year). These values represent around 2% of US goods exports to China and 11% of US goods imports from China, respectively. At the time of writing, the Chinese government had not indicated any further retaliatory measures over and above the tariffs aforementioned.

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Second, China has more to lose from a trade war than the US does, making it less likely to escalate tensions than is perhaps generally perceived; exports to the US account for a far larger share of China’s GDP than US exports to China do, as a share of US GDP.

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Third, the US President may well soften his stance like he did following the announcement of tariffs on US steel imports two weeks ago. Indeed, in a note we sent to clients on 13^th March, we highlighted the fact that the US President had already exempted Canada and Mexico from the tariffs and that further exemptions were possible. Today, it seems that other US allies and large steel exporters to the US, such as the EU, Korea, Japan and Brazil, will be excused from these tariffs too.

Admittedly, the President may have less incentive to soften his stance on China like he did with US security allies over steel. And by getting his allies to the negotiating table and exempting them from steel tariffs, he may well be able to garner their support in the fight to tackle China’s contribution to global trade imbalances and its alleged violation of the WTO rules. If the US does get the support of its trade allies, it makes China less likely to respond aggressively to the US trade tariffs. It could even force China to open up its markets to US firms, and firms from other countries, which would boost global trade.

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Finally, Donald Trump may have a protectionist inclination on trade, but he is also pro-business and uses the S&P 500 as a barometer of success. A trade war, threatening a large decline in the stock market and US jobs, is not in his interest, or that of his support base. With all this in mind, we do not expect recent trade tensions to escalate significantly.

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