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According to analysts at Deutsche Bank, if the trade war escalates to include US$200bn of Chinese exports at a tariff rate of 10%, it would have a meaningful impact on both sides, with the cumulative impact on China’s GDP growth at 0.2-0.3ppt (this includes the 25% tariff on the first $50bn of exports).

Key Quotes

“The products affected would likely include consumer goods, which the US government has so far been carefully trying to avoid hitting. Notably,  the big question on our economists’ mind is whether China will move beyond trade and target US business interests in China.”

“The team estimate that US firms sold US$448bn worth of goods and services to China in 2017, with c37% through trade and  c63% ($280bn) through local operations by US subsidiaries in China. Overall, China has not threatened officially to target US firms in China, but it’s one to watch and a risk that our economists see as rising as trade tensions build.”

Our US economists’ base case remains that the trade conflict with China will be settled before it progresses significantly beyond the initial imposition of tariffs on $50bn of imports in both directions. However, recent events have clearly increased the risks that the conflict will begin to have measurable negative economic effects.”

“If things deteriorate further, there is the possibility of a stock market correction in the -5% to -10% range, although if a settlement is then negotiated quickly, equities could recover and the risks to GDP mitigated. However, if a trade war gathers further momentum, it could well induce the next recession.”