Shrapnel from the bitter trade war between the US and China has wounded the global economy. And more carnage could be on the way.
US President Donald Trump increased tariffs on $US200 billion ($287.87 billion) of Chinese imports from 10 per cent to 25 per cent on Friday in the latest shot in an ongoing skirmish with the world’s second-largest economy that began in January 2018.
China then returned fire on Monday by increasing its own tariffs on US imports – a move that sent all three major US stock indexes (the S&P 500, Dow Jones and NASDAQ) into freefall, racking up their largest single-day losses since January.
Australia’s benchmark ASX 200 index followed suit, losing almost a full percentage point during trading on Tuesday.
The White House’s decision to increase the tariffs came despite the Chinese Ministry of Commerce cautioning that the nation would “take necessary countermeasures” in response.
Mr Trump then took to Twitter to issue a similar warning.
Such a backdown is unlikely, according to University of Technology Sydney professor, James Laurenceson, deputy director of UTS’s Australia-China Relations Institute.
“There is no way China will take a backward step and bow to Trump’s trade demands; it doesn’t really need to – the value added to China through US exports is only 3 per cent of GDP, so the US will struggle to bring China’s economy to a halt.”
But, while the “trajectory is clearly not good”, Mr Laurenceson said the direct impact of the feud “won’t be catastrophic” for the Australian and global economies.
Few winners in ‘lose-lose’ stoush
Mr Laurenceson said a continuation of the trade war would result in a “lose-lose” situation from which neither the US nor China ultimately benefitted.
The tariffs are estimated to have already resulted in US real incomes being reduced by a combined $US1.4 billion ($2 billion) a month last year through the increased cost of goods, according to a study published by the US National Bureau of Economic Research.
Major household appliances, such as washing machines and dryers, which were subject to the first round of tariffs imposed in January 2018, have seen a notable increase in price.
Not all sectors or countries will be equally affected, however, and CommSec chief economist Craig James told The New Daily that some Australian sectors even “could emerge as winners”.
“If the tariffs and higher prices have an impact in terms of the economy, [China] could look to stimulate other parts of its economy and we’ve seen that in recent months where more money has gone into infrastructure developments to support the economic activity,” he said.
“If that were to continue and become a focus for the Chinese leadership, that would be beneficial for our producers of iron ore, coal and base metals because it would mean greater demand for raw materials.”
Australia’s agricultural sector may also receive a boost, Mr James said, as the increased costs of importing and exporting between China and the US forces businesses in both nations to look elsewhere for goods.
The European Union, Mexico, Japan and Canada are among the most likely to profit from the trade war, according to United Nations Conference on Trade and Development research.
‘Cooler heads will prevail’
Uncertainty on the direction the trade war will take and what future developments will mean for businesses is currently restraining stock markets, but Mr James said an economic crisis is unlikely to sprout from the fight.
“If it was more embroiled in a global situation of higher tariffs and prices, then you’d have a substantial slowdown in the economy, but it’s more likely that cooler heads … prevail,” he said.