President Donald Trump “has fired the first shots in a US-China trade war”, says Fidelity’s Tom Stevenson in The Daily Telegraph. He has imposed tariffs on $34bn of Chinese imports, with another $16bn to follow soon. China says it will respond in kind, and Trump has now raised the prospect of duties on all $500bn of Chinese imports. “Add in the threats he has levelled” at Europe and Canada, and “the potential for a $1trn trade war is clear to see”.
Let’s not panic just yet, say Will Denyer and Tan Kai Xian in a Gavekal Research note. The US government’s recent tariffs on steel and aluminium imports, in conjunction with those on $34bn of China’s goods, will merely raise the effective US tariff rate on overall imports from 1.4%, the average figure since 2000, to just 2.2%. Decades of global trade liberalisation have gradually reduced the figure from 10% in 1945.
So it wouldn’t be much of a reversal. And keep in mind that businesses and consumers can substitute Chinese imports with products from other countries to some extent, while some will be able to shift to domestically produced alternatives.
Beware the indirect effects
This is partly why estimates of the impact of the tariffs are not especially worrying. The tariffs will reduce US GDP by only 0.03% in the third quarter of 2018, according to an estimate by Moody’s Analytics, which isn’t much for an economy worth $20trn. Similarly, JPMorgan notes that the first round of US tariffs apply only to 2% of China’s exports, says Christopher Beddor on Breakingviews. And even the drag on the Chinese economy from 25% levies on all Chinese exports to the US wouldn’t be that bad. JPMorgan reckons that China’s growth in those circumstances would slow by a mere 0.5%.
The trouble is, however, that modelling the damage is hardly an exact science, says The Wall Street Journal’s Justin Lahart. Consider, for example, Harley Davidson’s announcement that it will shift production to Europe from the US to avoid the EU’s tariffs on its motorbikes. “A typical economic model” might predict lower sales owing to the tariff, but it wouldn’t foresee a wholesale move offshore, which implies a bigger reduction in GDP. Gauging the impact of uncertainty and confidence is tricky too. In modern supply chains unfinished goods are imported and exported several times during the manufacturing process, so the effect of tariffs would be magnified.
Stocks are starting to shake
This sort of calculation is unnerving equity investors, explaining why US and Chinese stocks have “swooned”, says Beddor. Some American companies have said they are reducing or delaying investment because of the trade outlook. That will undermine earnings growth soon. Stockmarket slides also damage overall economic confidence. Many economists may not be too worried – yet – but equities are beginning to sense just how ugly this could get.