Risk of trade tension escalating real

Hit to global trade

“The conclusion of the ECB echoes earlier Bank of England simulations which suggested that in a similar scenario, US output could take a hit of 2.5 percent and global output 1 percent through trade channels alone. The Bank of England noted that the hit to global GDP would be substantially larger if everyone put up tariffs against everyone else.”

Trump’s trade war is also not just confined to China, as he has also threatened the European Union, famously complaining about German BMWs cruising around Manhattan. “Despite an apparently successful visit by the EU Commission president to the US to defuse trade tensions, Trump said at a campaign rally in West Virginia at the end of August: ‘We're going 

to put a 25 percent tax on every car that comes into the United States from the European Union’,” Cornelissen said.

Dizzying numbers

The latest round of US tariffs is a 10 percent levy on $200 billion worth of Chinese goods which came into effect in September, on top of the $50 billion that came into effect in August. “Despite the slightly dizzying numbers, the products targeted so far still represent only a small part of world trade,” Cornelissen said.

“It is therefore understandable that the tariffs have not yet significantly damaged producer and consumer confidence. This goes a long way to explain the muted financial market reaction so far.”

“However, further escalation is looming. The US has threatened to hike the 10 percent tariff rate on $200 billion of goods to 25 percent at the beginning of next year if China doesn’t ‘change its ways’ – though it is still not entirely clear what the negotiation goal of the US vis-à-vis China is.”

Congressional elections

“Trump could become politically weakened in the mid-term Congressional elections on November 6, but this is unlikely to have much impact on his policies against China, as a hard line against the country is generally popular among the Democratic opposition and also in significant parts of the US business sector.”

“But it could mean that his pressure against Europe diminishes due to lack of support. With an eye on the presidential elections of 2020, Trump could choose to keep political tensions high with China, in the hope that this will increase his re-election chances.”

“Higher tariffs will thus become a permanent feature for the coming years. For investors, there is little upside in the escalating trade war. They can only hope that a more drastic escalation from current levels does not materialize.”

The author is Chief Economist at Robeco. The original headline of this opinion article was ‘Oh what a lovely trade war’. 

The opinions expressed here are those of the writer and do not represent the views of China Daily and China Daily website.