US/China trade war could lower world GDP by 0.5%, says BBVA

HONG KONG - Estimates prepared by major banking group BBVA suggest that a US/China trade war which includes tariffs already approved, those planned against China for US$200 billion and those projected for the automotive sector could lower world GDP by 0.5 points below trend.

BBVA says its estimate is subject to certain conditions (equivalent response by countries affected, limited ability of the US to substitute falling imports, indirect effects through global value chains and some negative effect on confidence and financial markets).

“The effect is by no means negligible, but nor does it seem like a disaster,” BBVA says. “In fact, it is similar to a scenario estimated by the IMF in the (northern) spring.

“But we cannot rule out the possibility that, in the event of an all-out trade war, the effects on confidence and the dynamic adjustments at global level would translate into a much bigger fall in global GDP.”

BBVA says the damage that could potentially be caused by a protectionist US trade policy is significant, but difficult to evaluate, for several reasons.

“Firstly, because, as in other areas, US trade policy has been erratic, and it is not easy to guess the administration’s intentions or the course that future negotiations will take.”  

“Furthermore, the direct impact of the measures on GDP depends very much on how economic agents react to higher import duties (a variable mixture of higher prices, reduced supply, substitution by alternative imports or domestically produced goods, disruption of global production chains etc., all of which factors vary from one sector to another and are difficult to estimate).  

“Aside from this, a sufficiently intense trade war may lead to a decline in agents’ confidence, a reduction in investment, and deterioration in global financial conditions that amplify the direct effects.”

BBVA says the brief history of Trump’s protectionism has been an eventful one.

“In the first year of his term the US focussed on the renegotiation of NAFTA, which is currently on hold.

“In his second year, the US President concentrated efforts above all on measures and threats against China, which have intensified (except for a brief lull in May) to the point where he has threatened to extend the measures to all imports from the Middle Kingdom.

“Vis-à-vis Europe, following the approval of blanket tariffs on US imports of steel and aluminium, the US started to look at raising import duties on cars, although the initiative has been halted temporarily following the agreement between Trump and Juncker.

“The fact is that both economies have a common interest in defending intellectual property rights and non-discrimination against foreign companies as far as China is concerned.

“But the reasons for Trump’s protectionism go beyond that, and cannot always be explained in terms of strict economic rationality.” www.bbvaresearch.com (ATI).