Trade war: impact on global economy

Trade war: impact on global economy
United States of America’songoing trade war with the European Union and China have started to weigh on the global economy. The latest indication of the trade war comes from activity reports in Japan..

The ongoing US trade war with the European Union and China have started to weigh on the global economy. The latest indication of the trade war comes from activity reports in Japan, US and Europe. 

Background

The protectionist trade policies by the US president seem to overlook the economic history of the country. The US Smoot-Hawley tariffs enacted in 1930 are thought to have inspired a trade war, leading to a massive decline in global trade. World trade fell by 66% from 1929 to 1934, while US exports and imports to and from Europe each also fell by about two-thirds.

The US has raised concerns about a full-blown trade war by targeting Chinese imports. After months of rhetorical exchanges between Washington and Beijing, the imposition of the new import taxes makes real a conflict that has rattled markets, scrambled corporate supply networks and chilled business investment.

Last month, the White House announced plans to stick 25% tariffs on 1100 Chinese goods. China is not happy about this, and Beijing has vowed to retaliate with the same value: 25% tariffs on US products - worth $34 billion per year. Each side has threatened further tariffs on the other and tensions continue to escalate, sparking fears of an all-out ongoing global trade war. Meanwhile, Trump imposed 25% tariffs on steel and 10% on aluminum with the EU, Canada, and Mexico. The EU responded by imposing its own import duties of 25% on a range of U.S. goods.

China on 11th July vowed to take “countermeasures” after the United States announced 10%  tariffs on an extra US$200 billion worth of Chinese imports.  The proposed US duties on $200 billion worth of Chinese imports could take effect after public consultations end on August 30. 

Analysis 

The latest signs of the trade war  fallout came in activity reports from Japan, Europe and the US. Many manufacturers have reported additional uncertainty and  are also facing higher raw-material costs, another squeeze on earnings. According to Abby Joseph Cohen, advisory director at Goldman Sachs, global growth will continue into 2019, but it’s moving into a slower phase. A trade war on top of that would be a further weight.

Due to  the tariffs, Harley-Davidson Inc. on Tuesday cut its profit margin forecast as the company was caught in the crossfire of the trade war last month. Dutch electronics firm Royal Philips NV says an escalation of tariffs may mean it has to pass on costs to customers. Whirlpool Corp. said rising raw material costs hurt results in some of its markets in the second quarter.

In the 19-nation euro area, IHS Markit’s monthly survey showed growth softened in July on weaker new orders and deteriorating confidence. Factory activity in Japangrew at the weakest pace since 2016 and also in the U.K. The report comes just days after G-20 economies said that trade tensions are threatening global growth.

The euro-area composite Purchasing Managers Index for manufacturing and services fell to 54.3 from 54.9 in June, a sharper drop than economists had forecast. In the U.S., the PMI report showed continued growth in private-sector activity, but a second straight drop in goods export orders. 

The Pittsburgh-based industrial group,Alcoa, was one of the first stock market heavyweights to feel the impact of Mr. Trump’s aggressive tariff policies. While the big drop hasn’t come yet, analysts warn the prospect is still lurking in the background. Analysts at UBS said US and European stock markets stand to lose at least 20 % in a trade war, bringing the stock boom that has lasted for over 9 years to an abrupt halt. 

China unveiled a package of policies to boost domestic demand as trade tensions threaten to worsen the nation’s economic slowdown, sending stocks higher. The onshore yuan fell as much as 0.65% to 6.8295 per dollar, the lowest level since June 2017. Stocks in Shanghai and Hong Kong advanced. From a tax cut aimed at fostering research spending to special bonds for infrastructure investment, the measures announced late Monday are intended to form a more flexible response to “external uncertainties”.

The Trump administration has unveiled a $12bn plan aimed at helping US farmers hurt by the intensifying trade war. The aid is intended to protect the industry as countries raise taxes on US products such as soybeans in response to the president's new tariffs. The subsidy attempt is to pacify the farmers who are a crucial voting bloc for President Trump. 

Assessment

Our assessment is that the ongoing trade war has clearly become a major cause of concern, especially among manufacturers. We believe that both firms and consumers have become increasingly worried about the impact of tariff war on demand, prices and supply chains. Although this is an early stage to assess the consequences of the trade war, we feel that it will continue to  impact the global economy adversely. We also believe that Trump’s confidence to win a trade war can only be toppled if the escalations have a gruelling impact on the US economy.

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