Tags: trade war | uncertainty | damaged | economy

Trade War 'Uncertainty' Has Already Damaged Economy

Trade War 'Uncertainty' Has Already Damaged Economy
(Sergio Lacueva/Dreamstime)

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Monday, 13 May 2019 08:10 AM Current | Bio | Archive

The weekend has seen President Donald Trump tweet that negotiations with China were where the U.S. wants them to be.

"I think that China felt they were being beaten so badly in the recent negotiation that they may as well wait around for the next election, 2020, to see if they could get lucky & have a Democrat win - in which case they would continue to rip-off the USA for $500 Billion a year....," Trump tweeted.

"....The only problem is that they know I am going to win (best economy & employment numbers in U.S. history, & much more), and the deal will become far worse for them if it has to be negotiated in my second term. Would be wise for them to act now, but love collecting BIG TARIFFS!" Trump concluded.

From its side, China has suggested that more negotiations will take place in Beijing.

At the same time, more trade tariffs or taxes are likely to loom. China has to announce its response to the last round of tariff or tax increases from the States and the U.S. is expected to announce plans to “tax” American consumers of everything partially made in China.

For investors it’s worth remembering that the last tariff or tax hike has effectively a couple of weeks before it actually takes effect and to tax everything partially made in China will take some months to implement.

The Fed’s Vice Chair Richard Clarida, the Boston Fed President Eric Rosengren and the Dallas Fed President Robert Kaplan are all scheduled to speak today, and there “may” be an opportunity to comment on the Fed’s reaction to the trade situation.

Generally, central banks are more likely to focus on the growth risks of higher taxes than the inflation consequences of higher taxes.

Earlier trade tariffs or tax increases were relatively easy to evade. This is why global trade has remained fairly stable as a share of the world economy. At some inconvenience and some costs goods could be re-routed and supply chains tweaked.

However, the wider the scope of the tariffs or taxes, the harder it is to evade them.

Perhaps more importantly, the economic damage of the tariff or tax increases doesn’t necessarily rise from the direct impact on trade itself. Rather the uncertainty that has been created by the tariff or tax increases challenges investment by companies affecting manufacturing and exports, which is of course of great importance to investors.

Nevertheless, the damage of “uncertainty” has already been done.

In global economic terms, there are now 3 broad scenarios:

  • If there is a relatively swift resolution, perhaps by the end of June say, then the tentative stabilization of growth that had been emerging in the world economy, should continue, and the world will have its eight successive year of around trend growth.
  • If the dispute drags on, but doesn’t escalate significantly, then the world economy is likely to dip “below” trend growth.
  • If there is an escalation, then growth would be pushed significantly lower, probably mainly in 2020.

A recession remains unlikely in 2019.

While recessions are caused by either “Overheating” or “Policy error”, and an escalation of the trade dispute would be a “sufficient” policy error to possibly cause a recession, it would still take some time for that to have effect.

Meanwhile, Saudi Arabia has suggested that two of its oil tankers were sabotaged of fthe coast of the United Arab Emirates.

Financial markets are likely to focus on tensions in the region.

Notwithstanding the trade dispute, WTI and Brent crude oil are both up by more than 1 percent since Friday’s close.

Yes, markets are back in “risk off” mode.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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The damage of “uncertainty” about the trade war with China has already been done.
trade war, uncertainty, damaged, economy
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2019-10-13
Monday, 13 May 2019 08:10 AM
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