New Studies Are Trying to Quantify Tariff Impacts
Unsurprisingly, the threat of trade wars tops many investors’ lists of global risks.
To read the full article from European Strategist Chris Bailey, see the Investment Strategy Quarterly publication linked below.
There is no word more dangerous in finance than “extrapolation,” and all but the most neophyte of investors have grown up with a backdrop of progressively liberal global trade rules. The General Agreement on Tariffs and Trades (GATT) in 1947 led to the creation of the World Trade Organization (WTO) in 1995. The WTO, which boasts a membership of 164 countries, may now preside over services and intellectual property, as well as more traditional manufactured goods, but new challenges have arisen in recent quarters. The threat of trade wars typically tops any investor’s list of current global risks.
A few studies in recent months have attempted to quantify the impact of new tariff actions from countries such as the U.S. and China. These studies have suggested an economic growth level reduction of around 0.3% in 2020 for both the U.S. and the pan-European economy compared to the previous status quo of no new tariff implementation. The suggested negative impact on Chinese economic growth levels is a little higher at over 0.5%, but in the wider scheme of things, this is a nudging down of economic growth rates, not an immediate precursor to economic recession.
- Trade angst that leads to less interaction between economies, in most circumstances, leads statically to lower economic growth as supply chains are interrupted and more expensive alternatives are less cost-efficient.
- China may no longer be the cheapest country to manufacture many goods, but a sharp slowdown in the country’s exports due to trade-war angst threatens much more than just a reduction in the country’s economic growth level.
- More trade frictions create further pressures and incentives for Europe to choose a side, or face new tariffs or sanctions from everyone else.
- Recent manufacturing sector data in Japan has shown an impact from the worsening global trade backdrop, at a time when Japanese domestic economic growth dynamism remains muted.
All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. There is no assurance that any forecasts will be realized. International investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. Investing in emerging markets involves additional risks. Investing in certain sectors may involve additional risks and may not be appropriate for all investors.