In what many experts describe as a game of chicken, the world’s two largest economies are going head-to-head on a war of words that can spiral into a devastating trade war.

 As the global economy and financial markets watch the rhetoric in fear, some of the leading investments banks on Wall Street such as JP Morgan and UBS maintain that the likelihood of a trade war is low.

In April 2018, president Trump announced plans to impose a 25% tariff on as many as 1300 Chinese exports, ranging from electronics to footwear.

In response, it only took China one day to unveil a list of American goods it plans on hitting with an identical 25% tariff, including key US exports such as cars and soybeans.

Interestingly, China is targeting $50billion worth of its adversary’s exports, a figure that is identical to the sum of Chinese exports targeted by the US.

Robert Carnell, chief economist at ING Asia Pacific, believes that it is almost certain that a US tariff on Chinese goods will be met with tit-for-tat retaliation and vice versa – as implied by China’s swift and mirror-like responses.

Subsequent threat of announcing “hit lists” worth $100billion or more presents a dilemma for China:  It is running out of US imports to impose its tariffs on.

Despite ominous signs that a trade war is on the horizon, many of the leading investment banks around the world remain hopeful that disaster will be averted.

UBS: “One-off Tariff” UBS’ Chief Investment Officer predicts that Trump’s tariffs in early March is likely to be a “one off tariff”.

  • UBS assigns a moderate 20-30% chance of a large-scale trade war
JP Morgan: “Little Danger of a trade war” While acknowledging the grave consequences of a trade war, Jim Glassman (head economist at JP Morgan) believes that the odds of a trade war actually occurring are slim:

  • Trump’s administration is sensitive to the business community’s needs (e.g Soybean producers) and thus won’t take actions that can potentially harm key industries.
  • Additionally, the market’s strong reaction to the already imposed tariffs will deter leadership in the two countries from escalating the situation.
Wells Fargo senior strategist: “very low probability” of trade war Senior global equity strategist Scott Wren puts his faith in US-China trade volumes to deter trade war.

  • The sheer size of trade volume will serve to deter escalation of tariffs.
  • Current tariffs are still “very small”.

While Bloomberg acknowledges that a trade war would bring about negative consequences on the two countries’ outputs, it believes that both economies are strong enough to take a hit from a trade war – provided it remains contained.

A large-scale trade war between the two economic giants, however, would inevitably spell disaster for both countries’ economies due to heavy US-China economic interdependence. As such, analysts have painted a dark picture should a trade war occur:

Macquarie
  • US unemployment rates to soar to 8.9% in 2020
  • GDP growth rate to plummet to 1.2% by the end of 2018
Moody’s
  • Trade war can cost up to 0.9% of China’s GDP

Japanese foreign minister Kono warns that a trade war would have far reaching regional and global repercussions, a view shared by banks and financial institutions:

ANZ
  • Economists at ANZ predict a more divided world in the light of a trade war. Should a trade war occur, ANZ believes that Trump will “push countries to take sides” – effectively plunging the world into a modern cold war.
IMF
  • IMF chief Christine Lagarde warns that a trade war will damage “the driving forces behind global economic growth”
UBS
  • UBS maintains global GDP growth rates of 4.1% despite threats of trade war
Bloomberg
  • Bloomberg estimates that the occurrence of a trade war could wipe $470 billion off the world’s economy – which is equivalent to 14.33% of the amount world GDP is expected to grow in 2018 (given world GDP of $79.9 trillion and assuming 4.1% growth rates)

At times, financial markets have reacted to nothing more than statements by US and Chinese officials. As officials from both countries released conciliatory statements, stock prices have surged in response to the relieving news – highlighting the financial market’s sensitivity to the war of words.

USD-CNY Exchange rate

Several Banks have readjusted their USD-CNY forecasts in April 2018:
National Bank of Canada
  • USD-CNY rates to dip to 6.10 in Q4 2018
UBS
  • USD-CNY rates to dip to 6.20 in Q4 2018
ANZ
  • Rates to dip to 6.25 in Q4 2018
Bank of America
  • Rates to soar to 6.40 in Q4 2018
Citibank
  • Rates to soar to 6.45 in Q4 2018

Equity

JP Morgan
  • US, Taiwan, and South Korea equity are likely to be most impacted from a trade war
Blackrock
  • S&P 500 to maintain 19% year-over-year growth in 2018
Bloomberg
  • S&P 500 can still react sharply to trade war developments – As it fell 1.7% on 04 April after China announces plan on US import Tariff

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