Escalation of the customs tit for tat eats into growth even further

The trade dispute between the USA and China threatens to escalate further. Owing to the strong international interconnections and closely interwoven supply chains there is hardly a country that is not in some way or other affected by this conflict. Only a few days ago, the Vice President of the US Chamber of Commerce was quite optimistic about the course of the trade talks between the USA and China. Now, however, the impression is that a new Ice Age is upon us and everything has gone back to square one. In the final analysis, the news in recent weeks was continually shaped by a constant “up and down”, albeit in a far more moderate tone of voice.

Given the new, tough tone, we should cast a glance at what consequences the further escalation of the customs tit for tat has for the two countries directly affected and for Euroland, too. The Chinese export trade is already feeling the strain of the punitive tariffs the US imposed last year, which is why the Chinese government has initiated various economic stimuli. And US exports to China are suffering from the tariffs already in place. Given the fact that the US economy relies far less on exports, these do not have as strong an impact. Thus, we expect the Chinese economy to sustain the greater dent to growth. Should the US President hike all punitive tariffs on Chinese goods already in place to 25%, then this will probably cut economic growth in China by about 0.2 percentage points.

Since China will presumably respond in kind and penalise US exports, the economic momentum in the US and in its wake in Euroland will be slightly lowered. In both economic regions we expect it to be a slight damper only, of about 0.1 percentage points. Above all the US economy is currently continuing to benefit from robust domestic demand, added to which there is historically low unemployment, which stokes private consumer spending.

Hardly surprisingly, all the direct participants and many of those indirectly involved will lose out from a renewed escalation of the “USA vs. China” conflict. The economic brake this poses will likely not be quite as dramatic as sometimes assumed. It should, however, be clear by now that the EU and Japan can also expect negotiations to be tough if the threatened customs duties on cars are to be prevented. Should an agreement be reached between the USA and China in the next few days after all, then it will not just be a minimum compromise that gets presented to the public. The scale of how much ground the Chinese give will be a key yardstick for the USA’s other trading partners.

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