Strategy: The implications of a global trade war
|Rising risk of a full-blown trade war
Rising risk of a full-blown trade war This week saw a dramatic escalation of the trade dispute between the US and China. The US administration upped the rhetoric against China by saying that if China retaliates against the new US tariffs on 6 July, the US is prepared to slap additional 10% tariffs on up to USD400bn of Chinese exports to the US. The Chinese side has clearly signalled a readiness to respond with equal measures ). With no negotiations in sight at the moment, our base case is shifting to a further escalation of the trade conflict between the two countries. There is a risk of deterioration in relations between the two sides already on 30 June when the US is due to announce its plan to restrict Chinese investments into the US and to limit exports of US tech products to China.
Can such an escalation be avoided? We remain sceptical. Firstly, there appears to be little trust between the two sides, notably on the Chinese side, after the US turned its back on the negotiated trade deal last month. Secondly, Trump is increasingly leaning towards trade and China hawks such as Peter Navarro, US Trade Representative Robert Lighthizer and National Security Advisor, John Bolton. However, Trump has previously made sudden changes in tactics (think of North Korea and this week on immigration), but we still only assign a 10-20% probability for new negotiations and a possible defusing of the trade tensions between the two sides.
Trade tensions between Europe and the US are also at risk of escalating. The EU has adopted a 25% tariff on EUR2.8bn of US goods (jeans, motorcycles, Bourbon whisky and several commodities) today in response to the US tariffs on steel and aluminium import from EU countries. This may well trigger countermeasures from Trump as with China, which could include tariffs on European car exports (read: from Germany) causing another retaliation from the EU and so on. Several emerging market countries such as Turkey, India and Russia have recently adopted countermeasures to US steel and aluminium tariffs.
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