The Daily Update - Trade Wars & Growth

A commentary from the UN Conference on Trade and Development (UNCTAD) on ‘The Trade wars: The Pain and the Gain’ discusses a new UNCTAD study, analysing the impact of US-China tariffs and the threatened tariff increase scheduled for March. In December the US delayed a threatened tariff increase to 25% on $200bn of Chinese goods until March 1 to allow time for negotiations to take place. Ms Coke-Hamilton from UNCTAD noted ‘Our analysis shows that while bilateral tariffs are not very effective in protecting domestic firms, they are very valid instruments to limit trade from the targeted country’. Noting the distortionary effects of tariffs she said ‘US-China bilateral trade will decline and [be] replaced by trade originating in other countries’ as tariffs change global competitiveness allowing producers not directly impacted to benefit and resulting in changes in trade flows.

Interestingly, the study estimates ‘that of the $250 billion in Chinese exports subject to US tariffs, about 82% will be captured by firms in other countries, about 12% will be retained by Chinese firms, and only about 6% will be captured by US firms. Similarly, of the approximately $85 billion in US exports subject to China’s tariffs, about 85% will be captured by firms in other countries, US firms will retain less than 10%, while Chinese firms will capture only about 5%.’ In terms of winners, the study notes that Europe, Japan, Mexico and Canada will be notable beneficiaries. Europe could capture $70bn in trade (~$50bn from China and ~US$20bn from the US) which would amount to ~0.9% of exports while Mexico’s $20bn potential gain would amount to ~6% of its exports.

However, the report also warns that ‘negative global effects are likely to dominate’ impacting the ’still fragile global economy’. One risk of an escalation in protection is ‘that trade tensions could spiral into currency wars, making dollar-denominated debt more difficult to service.’ With the global economy at a critical juncture, positive progress at the US-China negotiations ahead the March deadline is important. There has been some positive vibes of late with Treasury Secretary Mnuchin describing his meeting with Chinese Premier Liu He as ‘very productive’ and stating ‘We’re putting an enormous amount of effort to hit this deadline and get a deal. That’s our objective.’ Mnuchin and the US Trade Representative Robert Lighthizer are due to head to Beijing for further negotiations.

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