China-US trade war to hit large port economies, inflict ‘non-trivial’ damage

WASHINGTON - There is little denying that the continued imposition of tariffs as a means of punishment will result in what it terms “nontrivial damage” to each economy, BBVA Bank says in a special report on current US-China trade conflict.

“As it stands, the state of negotiations between the U.S. and China is uncertain, and there is little indication that the conflict will be resolved quickly,” BBVA says.

“The Trump Administration has made it clear that it will continue to target Chinese imports until its demands are met, yet the Chinese Government seems apathetic to these threats.

“The sting of these tariffs will be felt in targetted sectors, namely agriculture and machinery manufacturing; however, residual symptoms will appear across the economy to varying degrees in the form of higher prices, job losses, and reduced consumer and corporate wellbeing.

“At this stage, one can only hope that both sides will agree to a mutual resolution similar to that between the U.S. and the E.U. Until then, the risks to the economic expansion will continue to accumulate.

“Alternatively, if the disruption to global trade brought about by the Trump Administration results in a major transformation of global institutions and more free trade, the short-term costs of this trade war will be easily outweighws by the long-term benefits of reducing tariffs and other trade barriers.”

BBVA says eEstimates of the potential damage of a trade war are difficult given the complexity of global trade.

Chinese exports to the U.S. make up 4.1% of China’s GDP, as opposed to 0.6% for the U.S. However, the U.S. trade deficit with China is 30% smaller when measured in value-added terms than in gross exports terms because of the high foreign content in Chinese exports.

“For the U.S., the initial impact to GDP growth will be modest relative to China. However, the U.S. may feel severe residual effects from the escalating tensions.

“Due to the specific and targetted nature of the retaliatory tariffs, the impacts are likely to be heterogeneous.

“Furthermore, the shock to global investor confidence and the underlying geopolitical tensions could reduce portfolio and investment flows to the U.S.; these effects could outweigh any direct impacts to growth from rebalancing bilateral trade deficits.

“The most likely short-term outcome is higher costs, lower profit margins, a slowdown in hiring, and higher consumer prices.

“According to our estimates, the rise in average effective tariffs could increase core inflation 20 basis points, all things equal.

Any unanticipated rise in inflation could pull forward the Fed’s plans to increase rates, possibly leading to a more abrupt and prolonged rise in interest rates.

“The more rapid relative rise in interest rates would most likely put upward pressure on the dollar, lower U.S. export competitiveness and possibly widen the trade deficit —neutralising Trump’s push to lower the U.S. bi-lateral trade deficits through import tariffs.

“Additionally, domestic manufacturing firms, in order to avoid counter-tariffs in place against American exports, could move some of their production offshore.

“Higher input prices in sectors that do not directly benefit from the tariffs could also be large, as these sectors make up a nontrivial share of the economy.

“This, in turn, would drive up unemployment that currently sits at its lowest point in the last half a century.

“However, multinational firms with large exposures to foreign markets have not been adversely impacted by the trade tensions thus far.

“That being said, the U.S. tariffs which went into effect on July 6 concentrate on machinery and mechanical appliances, transportation, metals, and chemicals used in manufacturing.

“These tariffs reflect the Trump administration’s unrest against the unfair treatment of American high-tech firms.

“While such tariffs on consumer goods will result in certain benefits from a decrease in foreign competition, they will likely result in price increases and weaker demand for these products, depending on how easily firms and individuals can find new domestic or foreign substitutes.

“While strong corporate earnings are likely to offset some of impact from the trade tension, going forward there is a high probability that markets will face higher volatility and uncertainty.”

The BBVA report also says there is a high probability that the slowdown in trade flows will adversely affect cities with large and economically important ports.

“For example, about 15% or approximately US$77bn worth of goods that flow through the Los Angeles port district are subject to U.S. and Chinese tariffs.

“Similarly, 16.9% of the Dallas-Ft Worth district’s goods are subject to current tariffs.”

But while these figures could inflict damage on the port and industries with close ties to port activity, the amount of goods subject to the tariffs are small relative to the size of the local economy,” it says.

Houston is also exposed to the tariffs from a flow perspective with nearly $16bn of goods subject to existing tariffs, but remains insulated from any major shocks given that this accounts for only 3.3% of annual economic activity.  www.bbva.com (ATI).