Experts decode implications of trade war on global economy and markets

Indian markets tumbled in line with global peers on Friday amid rising global trade war fears. US President Donald Trump signed a presidential memorandum that could impose tariffs on up to $60 billion of Chinese goods including steel, although the measures have a 30-day consultation period. In retaliation, China unveiled plans to impose tariffs on up to $3 billion of US imports.

Here is a quick compilation of how leading experts interpret the situation and its implication for the global economy and financial markets.

Christopher Wood, Managing Director and Equity Strategist at CLSA

Trump seems totally focused on actually trying to implement the policy agenda he campaigned on and is also having some success in doing so. This suggests he is dead serious on the trade issue, as well as on the infrastructure issue which GREED & fear expects to get renewed momentum next year if the Republicans maintain control of Congress in the mid-term elections in November.

The stance on trade, if pursued by the Trump administration, can clearly make more waves in financial markets. The most likely outcome in GREED & fear’s view is that China will agree to some form of compromise that will stop an escalation into an outright trade war. Indeed there are already signs of this as China has already responded this week to the Trump administration’s threat of a Section 301 investigation targeting the intellectual property rights issue. Trump will also probably be satisfied personally if he can demonstrate he has delivered a “better deal” with China.

Hugo Erken, Rabobank’s senior economist and country analyst for North America, Mexico and India

President Trump will sign a plan which will probably entail the instalment of tariffs worth as much as $50-60 billion on Chinese products. Chinese export volumes could take a hit, ranging between $30 billion to 145 billion. The tariffs are expected to hurt the US as well, since US high-tech corporates and retailers have their products assembled in China to benefit from cheap Chinese labour.

China has little options to retaliate with tariffs without shooting in its own foot. A large share of US goods shipped to Mainland China consists of necessity imports, such as medicine, (medical) instruments and soybeans.

If trade tensions escalate, we currently foresee two outcomes: one where Europe cooperates with the US and one where Europe alienates from the US. These two scenarios could have significant negative implications for world trade and the global economy. We deem cooperation between US-EU towards China currently as more realistic than the other way around.

Irvin Seah, economist, DBS Group Research

The brewing fear over the past weeks of a trade war between the two largest economies in the world may materialize. Note both are Singapore’s top two export markets. Trade actions between both can’t be good for small and trade-dependent countries. Overall, the net impact on the global economy, if the situation deteriorates further, will be negative.

Import tariffs imposed on certain products from China could benefit exporters of similar products from other countries. The trade flows could be “diverted” from China to other competing suppliers. That is, if US importers find it too expensive to source from China, they could switch their procurement sources to countries like Taiwan, Korea, Vietnam, Thailand, Malaysia etc.

Siddhartha Khemka, vice president and head of research (retail), Motilal Oswal

Indian equity markets reacted negatively today, in-line with global markets. With US imposing fresh tariff targeted China, there is an increasing fear of a trade war which could impact economic growth. Markets are expected to remain volatile ahead of F&O expiry next week, as well as an end of Indian financial year (last week before the LTCG tax kicks in). While traders should remain cautious, the decline in good fundamental stocks would offer buying opportunities for long-term investors

CARE Ratings

If global trade volume shrinks on account of this trade war, our exports are bound to be buffeted. The expected double-digit growth in exports in FY19 may not happen. 

Global growth can be affected as a trade war will mean higher prices and lower growth in these two main geographies. This will impact our exports. Global GDP was valued at $ 75.3 trillion with USA and China contributing to $19.4 trillion and $11.9 trillion respectively.

India, too, can be targeted if USA does not stop with China. Presently we have a surplus with the USA. In 2016-17, exports were $42.3 billion and import $22 billion leading to a surplus of $20.3 billion, which may not be significant from USA point of view. In case of China, we have a deficit of $51.1 billion with exports of $10.2 billion and imports of $61.3 billion. Trade battles also make currencies volatile and we should be prepared for the same.