Are we on the brink of a global trade war?Contributor Maria Paola Toschi
Over the course of the year we have become significantly more pessimistic that these trade tensions will reach an amicable conclusion in the near-term.
Trade tensions have escalated between the US and China, with the US applying higher tariffs to goods imported from China. The European economy is caught in the cross fire. US equity investors are concerned that higher tariffs could dampen US corporate profits and business investment
What has happened this year?
As shown in Exhibit 1, the US and China have been at the epicentre of rising global trade tensions. The US started early in 2018 by imposing tariffs on imports of solar panels, washing machines, and metals. The total dollar amount of these imports was relatively limited. Then, in the summer of 2018 the US began taxing USD 50 billion of Chinese imports, followed in September by the announcement that tariffs would be imposed on a further USD 200 billion of Chinese imports. This additional USD 200bn are currently being taxed at a rate of 10%. This was set to increase to 25% on 1 January 2019, but at the November G20 summit, president Trump agreed to postpone the increase until 1 March 2019 providing some time for negotiations.
China has responded by implementing three waves of retaliatory tariffs on goods imported from the US, although the dollar amount is lower, due to the fact that China imports a much smaller amount of goods from the US than the US imports from China.
At one stage the US was considering raising tariffs on auto imports from the European Union (EU) but plans have been shelved for now. In July, an agreement to work towards lower tariffs and to look at reducing trade barriers was set in motion by the US and EU authorities.
There has been a de-escalation in tensions between the US and its neighbours—Canada and Mexico. The North American Free Trade Agreement (NAFTA) was torn up but has now been salvaged in the form of the United States, Mexico and Canada Agreement (USMCA).
EXHIBIT 1: Trade tensions in 2018
Key: Green = effective, blue = proposed
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