The Costs of a Full Blown Trade War, Should One Happen

The Costs of a Full Blown Trade War, Should One Happen

The Costs of a Full Blown Trade War, Should One Happen

The US and China have announced tariffs on each other’s goods recently, and have threatened to impose more.

Assuming they take effect, the tariffs that China has announced so far on American goods will focus on agricultural products, automobiles, aircraft and chemicals.

Although exports of these industries to China are sizable, exports of the agricultural and other primary products industry totaled nearly $20-B in Y 2016, they represent a relatively small proportion of total industry output.

For example

US exports to China are equivalent to less than 5% of the output of the agricultural and other primary products industry.

In HeffX-LTN’s view, Chinese tariffs on these 4 broad industries would not a big deal from a macroeconomic perspective.

The Big Q: What happens if a full-blown trade war were to develop?

The Big A: In a worst-case scenario in which each country were to levy increased tariffs on all of the goods that the other country exports, the overall effect on the US economy would be manageable.

The estimated value added in American exports to China accounts for only 0.5% of total value added in the US economy.

The other way around

China’s exports to the United States generate about 2% of it’s value added. It appears that China would have more to lose than the United States from an all-out trade war, should one develop, which is not likely.

But if one should develop, the potential consequences for the US is that share prices would decline, and lower wealth could lead to slower growth in US consumer spending.

Plus, bond yields in the United States could rise if China was to off some of its sizable holdings of US Treasury securities. Which is also, not likely.

America First

Have a terrific weekend.

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