Trade wars: An old hope

The effects of a trade dispute can be devastatingThe effects of a trade war can be devastating

David Page (AXA IM) |  We believe the US has been using tariffs primarily as a negotiation tool; China appears a special focus. But domestic political motives also appear to be a driver.

We expect further tariffs hikes on Chinese products (including on an additional $200bn worth of goods). We expect tariffs on automobiles to be off the table for now.

In line with other studies, we find that most of the impact on growth would not come from the direct channel (trade) but from the associated tightening in financial conditions. The scope of the latter is difficult to model (here we use event studies), and is hence associated with large uncertainty.

In our central case tariff scenario, US GDP growth would be reduced by ¼ percentage points over two years and inflation higher by about 0.1ppt. This would not change our US Federal Reserve outlook.

In a risk scenario of a 10% blanket tariff on all US imports (and similar retaliation on all US exports), the impact would be around 1.4ppt for growth and 0.3ppt for inflation over two years. This would likely pause the Fed’s tightening cycle.

Conversely, successful trade negotiations could lead to more open global trade that would provide a modest boost to the growth outlook beyond our forecast horizon.

We additionally highlight the risk that ‘successful’ trade negotiations and a domestic political incentive may result in President Trump returning to this policy in future years.