How the trade war between the United States and China could turn ugly

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The Trump administration is currently reviewing another set of tariffs on Chinese products worth 16 billion US dollars. If the US stops importing $ 50 billion worth of imports, and China does the same, the impact on the economies of both countries will be modest, according to Bloomberg Economics

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Spillovers galore

However, Trump said last week that it could increase its tariffs to more than 500 billion US dollars of Chinese goods, to essentially cover all imports from China . An Asian Nation in the United States

Economists say they can not fully measure the indirect impact that could occur as the trade war worsens. A decline in US financial markets could be such an element. Factor of a significant collapse in stock prices, with the effect of driving the decline in wealth, and the probability of US growth widens to 0.4 percentage point , according to Bloomberg Economics.

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Chinese equities and the currency have already taken over because of the beginning of the trade war. The Shanghai Composite Index is in its longest run of losses for six years, and the yuan has recorded its worst quarter since 1994 last month. The makers were in force trying to reinforce the feeling.

Business and consumer confidence is another "X factor". According to minutes from the June Fed rate-setting committee meeting, commercial contacts in some US Federal Reserve supervised districts indicated that they had reduced or delayed capital expenditures due to uncertainty on the trade. are starting to see more companies react negatively by limiting their investment, "said Gregory Daco, chief economist of the United States at Oxford Economics." Anecdotal statistics on business capital spending are beginning to hang. "

In a severe scenario, declining business investment and lower consumer spending would reduce demand, which could lead other countries to trade barriers create a vicious circle of increasing protectionism and slowing down

It is hard to measure how the "second-order" effects of a trade war would hurt the global economy, said Atsi Sheth, chief executive of Moody's Investors Service.

"We have not had a real trade war on such a scale for a long time," said Sheth. "The last 50 years have been devoted to more integration, so we do not have very good episodes to choose from in the past that would inform us. "

Breaking Relationships

Then There's Unpredictability politics. 19659006] For now, China has avoided increasing the bet. "Our view is that trade war is never a solution," Premier Li Keqiang said during a visit to Bulgaria on Friday after the first round of talks. "It does not benefit anyone."

"Beijing's reaction has been restrained," said Gene Ma, chief economist of China at the Institute of International Finance. "Internally, they have a policy to contain this issue, they have decided that it should be treated as a business issue, not a geopolitical issue."

This could change, especially if Trump continues to blame China for unfair trade and stealing US intellectual property. US-China relations have probably dropped to their lowest level in years, despite Trump's praise for President Xi Jinping and the prediction that the pair would "make great progress together!"

If Trump does not give in , Beijing could take it with other measures, such as the flood of US companies operating there with red tape, or the use of a weaker yuan like a weapon.

The longer the spike lags, the harder it will be to relax, said Bill Reinsch Center for Strategic and International Studies. While the short-term damages of the tariff are not too painful, the cumulative impact is important, he said, adding that he anticipates a long-term dispute, not a quick resolution.

Trump "only has a strategy, which is to hit harder," said Reinsch. "It's as if two 8-year-olds were staring, he's betting that the Chinese will blink."

Bloomberg