Who Wins a Trade War - May 15, 2019

The simplest answer – no one, as each side retaliates.

  • U.S. exporters suffer.
  • Higher tariffs equal higher prices.
  • U.S. and global growth face stiffer headwinds.
  • Disruption of supply chains can occur.
  • Greater stock market volatility is a risk.

A better question – who comes away with fewer bruises?

China vs the U.S.

Most economists believe China is more vulnerable.

  • U.S. exports to China account for less than 0.9% of U.S. GDP.
  • Chinese imports to the U.S. account for 4.2% of China GDP (U.S. BEA, Intl Monetary Fund).

A prolonged trade war may encourage companies to leave China for cheaper locales, avoiding U.S. tariffs – advantage U.S.

While a low risk, China could begin selling U.S. Treasury holdings, but not without consequences to its own economy and finances.

Investor’s corner

Reflecting increased economic uncertainty, the S&P 500 Index1 is down a modest 4.5% since peaking May 3 (St. Louis Fed – through May 13). Multinationals that are more dependent on the global economy are likely to face greater uncertainty.

However, today’s tensions aren’t simply about a trade gap with a trading partner. Theft of U.S. intellectual property and other onerous practices ups the ante.

If a deal can be achieved, shorter-term uncertainty may be the tradeoff for longer-term U.S. benefits.