The trade war that erupted Friday between the US and China carries a major risk of escalation that could weaken investment, depress spending, unsettle financial markets and slow the global economy.
The opening shots were fired just after midnight, when the Trump administration imposed a 25 per cent tariff on US$34b ($49.7b) of imports from China, and Beijing promptly retaliated with duties on an equal amount of American products. It accused the US of igniting “the biggest trade war in economic history.”
Because of this first round of hostilities, American businesses and, ultimately, consumers could end up paying more for such Chinese-made products as construction equipment and other machinery. And American suppliers of soybeans, pork and whiskey could lose their competitive edge in China.
These initial tariffs are unlikely to inflict serious harm to the world’s two biggest economies. Gregory Daco, head of US economics at Oxford Economics, has calculated that they would pare growth in both countries by no more than 0.2 per cent through 2020.
But the conflict could soon escalate. President Donald Trump, who has boasted that winning a trade war is easy , has said he is prepared to impose tariffs on up to US$550b in Chinese imports — a figure that exceeds the US$506b in goods that China shipped to the U.S. last year.
Escalating tariffs are likely to slow business investment as companies wait to see whether the administration can reach a truce with Beijing. Some employers will probably put hiring on hold until the picture becomes clearer. The damage could risk undoing some of the economic benefits of last year’s tax cuts.
“Trade disruption is the greatest threat to global growth,” said Dec Mullarkey, managing director of investment strategies at Sun Life Investment Management. “The direct effects will be amplified