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  • Writer's pictureARI Media

US, China's Potential ‘Trade War’

Escalating trade tensions between the U.S. and China shook up financial markets Wednesday, although the economic fallout from the tariffs announced by the U.S. and China’s countermeasures so far remain limited, economists say.

U.S. stocks fell sharply at the open before trimming or erasing losses. The drop came after Chinese officials said they plan to impose tariffs of up to 25% on 106 American products ranging from soybeans to airplanes. The move comes after the Trump administration on Tuesday detailed plans to impose tariffs on $50 billion of Chinese goods unless Beijing makes major trade and investment concessions.

The S&P 500 SPX, +1.02% was up 0.1% in recent action, while the Dow Jones Industrial Average DJIA, +0.79% gained 42 points, or 0.2%, after earlier dropping more than 500 points.

So, what would it take to escalate this U.S.-China trade skirmish into a global trade war? Adam Slater, lead economist at Oxford Economics, broke down the warning signs in a note.

The China-U.S. relationship carries the biggest potential for causing global economic damage, Slater wrote, noting that Trump administration officials have become “somewhat fixated” with the $340 billion bilateral trade deficit the U.S. runs with China. President Donald Trump has called for the gap to be slashed by $100 billion.

In reality, any serious effort by the U.S. to slash the deficit by $100 billion would be “hugely disruptive,” Slater said, as it would require U.S. exports to China to rise by 50% or Chinese exports to the U.S. to fall by 20%. That would imply huge shifts of activity to the U.S., an “implausible” level of trade liberalization by China, an enormous appreciation by China’s currency, or “far greater” U.S. protectionism against China.

“The latter would require the U.S. to proceed aggressively against sectors such as telecoms and electronics (some 30% of Chinese exports to the U.S.). This would inflict a degree of self-harm on the U.S. as U.S. firms are significantly involved in these Chinese sectors (including indirectly e.g. in branding)—and this is likely to be a barrier to very strong U.S. action,” he said. (See chart below.)

But it isn’t just about the U.S. The potential fallout from stronger U.S. action against China would hit other economies even more severely, with Korea and Taiwan providing a large part of the value added to Chinese exports. He said high foreign content in Chinese exports to the U.S. means the bilateral trade deficit with China is “hugely overstated.” (See chart below.)

It is also worth keeping an eye on the efforts to renegotiate the North American Free Trade Agreement, or Nafta, given U.S. complaints about falling U.S. content in imports from Canada and Mexico and rising Chinese content, he said.

The U.S.-European Union relationship is also a potential flashpoint, with autos, which account for a large chunk of U.S. imports from the EU, the key concern.

Slater doesn’t think a serious trade battle is on the horizon, but warned that the “risk of escalating trade conflict is non-negligible, especially with the U.S. fiscal expansion likely to suck in more imports in the next couple of years, possibly adding to trade tensions.”

via HSN

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