How likely is a global trade war?

How likely is a global trade war?

Following President Donald Trump’s recent announcement on tariffs on imports of steel, aluminum and a variety of consumer products from China, a frenzy of concern about the risk of a global trade war was unleashed.
However, Vanguard expects the direct economic impact of the new tariffs to be minimal. We believe that the real importance they have lies in the broader and longer-term implications for international trade policy.
Tariffs in context
The Trump administration announced that first that the impositions of tariffs of 25% to steel imports Y 10% to aluminum . These products together represent less than 2% of the total imports of the United States. That estimate is still high because Canada, Mexico and other allies, including the European Union, were temporarily exempt.
The administration showed on March 22 a package of tariffs and sanctions trade on goods imported from China. Like tariffs on steel and aluminum, these taxes would probably affect only a small portion of bilateral trade between the two largest economies in the world.
To better understand what an escalation of these disputes would look like, it is useful to consider commercial exchange in a historical and global context.
US tariffs UU They have been declining since the 1930s and have remained below 5% for more than four decades, as shown below. According to the latest tariff report from the World Trade Organization, the current average tariff in the United States is 3.5%, the second lowest in the G20.

Note: The data shown are annual [1900 – 2015] Source: US International Trade Commission. UU
Although the United States has established trade measures that are not tariffs such as anti-dumping and national security protections, it continues to be one of the least protectionist countries in the world together with the members of the European Union.
Some market observers extrapolate the change in tariff policy to indicate the start of a trade war, similar to the vicious cycle that triggered the infamous Smoot-Hawley Tariff Act of 1930, that dramatically reduced the commercial flow and economic growth in the early years of the Great Depression. Given the history of reducing trade barriers and knowing the benefits of economic integration, Vanguard believes that It is unlikely that the US administration will dramatically change trade policy due to the risk of disrupting economic growth.
The benefits of a slight increase in tariffs quickly diminish
Although we give a low probability to a commercial war, Vanguard’s analysis in the research paper of the World Macroeconomic Issues in 2017 (“Commercial situation: it is complicated”) calculated the impact of various escalations on trade tensions. Thus, a slight increase in tariffs has a marginal benefit in the short term in the economy that imposes them if there are no reprisals. However, these benefits are quickly reduced and can be offset by the tariffs imposed as reprisals and market volatility.
These increases in tariffs would compensate each other and the final result could be higher prices for the consumer and lower growth due to less commercial activity, which would mean a situation where everyone loses.
Although unlikely, a commercial war environment could reduce the GDP of the United States by 1.7 percentage points and increase inflation by 0.4 of one percentage point annually. In this case, the impact would be enough to force the US Federal Reserve. UU to interrupt its tightening of interest rates and to choose between suppressing excess inflation and supporting low growth.
Secondary effects of tariffs could put the United States in a backward position
In addition to these estimates of the direct impact on the US economy, less cooperation in trade during the following years could damage international investment flows and put the United States in a backward position rather than prominent in future economic and political alliances .
Investors can reasonably assume that commercial rhetoric will continue to be a source of volatility during 2018 as the Trump administration tries to set a new course in trade policy without triggering reprisals from the United States’ global trading partners.
Although there is still a low probability of commercial wars, it is worth observing closely the decisions regarding politics, and the international responses they generate, to be attentive to the signs of escalation.

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