Who Really Benefits from a Trade War?

“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win,” tweeted US President Donald Trump on March 2[1].

That was just The Donald’s opening salvo. Since then, he has proceeded to fire regular rockets at powerful members of the international community, with China and the EU receiving a particularly hefty bombardment.

In March, Trump signed an order imposing a 25% tariff on foreign steel and a 10% tariff on foreign aluminium[2]. China reacted, imposing tariffs on US imports worth US$3billion. Trump hit back, threatening a 25% tariff on 1,300 Chinese imports[3]. In response, China imposed a 25% tariff on 106 US imports[4]. In July, The White House said it was considering an additional tariff 10% on Chinese exports worth US$200 billion[5].

Trump is also involved in a preliminary skirmish with the EU. When Trump’s tariffs on imported steel and aluminium hit the EU in May, the EU imposed 25% tariffs on US imports worth US$3.2 billion, a figure that could increase to imports worth US$4.3 billion if the trade dispute continues[6].

“Canada imposed tariffs on US imports worth US$12.8 billion, and Mexico imposed tariffs on US imports worth US$3 billion.”

“The trade that we believe in is built on rules, trust, reliable partnership. The United States’ decision to impose tariffs on Europe goes against that. In fact, it goes against all logic and history,” said European Commission President Jean-Claude Juncker[7].

Trump’s response was a threat to slap a 20% tariff on European cars[8]. Canada and Mexico also retaliated against Trump’s steel and aluminium tariffs. Canada imposed tariffs on US imports worth US$12.8 billion[9], and Mexico imposed tariffs on US imports worth US$3 billion[10].

Battle has commenced, but who stands to gain and who to lose out from a full-blown trade war?

Let’s start with the US versus China. According to the South China Morning Post (SCMP), “the impact on economies and sectors will vary”[11]. Countries that export items to China that are then used to manufacture goods sold to the US, such as South Korea, Taiwan, Vietnam and Malaysia will suffer. Japan exported goods worth almost US$700 billion in 2017, and China and the US topped its list of trading partners, so a trade war would not be welcome. If China decides to purchase more American microchips to placate Trump, South Korea, Japan and Taiwan, the countries that produce most of the US$200 billion worth of chips China imports each year, would take the hit.

Financial Secretary of Hong Kong Paul Chan Mo-po, writing on his official blog, expresses his concern that a US-China trade war would have a negative impact on Hong Kong’s economy and affect one in five Hong Kong jobs. Paul Chan Mo-po states a trade war would have “no winner”[12].

But the SCMP lists several potential winners: Soybean exporters, pork and plane suppliers and steel importers. Soybeans are the US’s biggest export to China, worth US$14 billion per year; the 25% tariff will benefit South American grain exporters including Argentina and Brazil. Pork supplying nations such as Denmark, Germany and Spain could benefit from the US$3 billion worth of tariffs on US pork products. Buyers of Chinese steel, such as the Philippines, could benefit from lower prices as China seeks to divert its supply away from the US.

“A trade war between the China and the US would hit China harder, costing China 1.3% to 3.2% of GDP and the US 0.2% to 0.9%.”

Ross Clark, writing for The Spectator USA, argues that a trade war will hit different segments of society in China and the US. “Put simply, in China the effect of a trade war will fall more on producers than consumers; in the US it will be the other way around,” he writes[13].

Calculations by Wei Li, a senior China economist for Standard Chartered in Shanghai, reported in the Financial Times, suggest a trade war between the China and the US would hit China harder, costing China 1.3% to 3.2% of GDP and the US 0.2% to 0.9%[14]

Others argue that a trade war will have little impact on the GDP of either country and the fight is a political one. “In recent days, a small but growing chorus of cynics has suggested that, while a trade war might be economically ruinous for producers and consumers in both nations, leaders from the two countries might find protracted conflict politically advantageous,” writes Fortune reporter Clay Chandler[15]. Chandler quotes calculations from Hoover Institution academics Niall Ferguson and Xiang Xu, suggesting that a trade war would hit China’s GDP by 0.3% with the effect on US GDP even less significant.

The EU doesn’t seem to fear Trump, with a recent European Commission paper claiming that a 25% tariff on European automobiles, would leave a US$13 to US$14 billion dent in US GDP[16].

“The best policy for the British, who will be in a challenging situation after Brexit, is to trade with the Americans on their terms.”

The effect of a trade war on the UK will depend on the outcome of the Brexit negotiations. Deputy Managing Editor of The Independent, Sean O’Grady, argues that the UK will have to kowtow to America to secure a beneficial trade arrangement. “The problem with the US, as with the EU, is that they are both about 10 times larger than the UK, and we need them more than they need us. It’s a simple matter of economic power and leverage… The best policy for the British, who will be in a challenging situation after Brexit, is to trade with the Americans on their terms because those are the only terms we are likely to get,” he writes[17].

Leading US economist Paul Krugman has argued in The New York Times that a trade war could result in a 70% reduction in world trade and a 2-3% reduction in world GDP[18].

To quote former British Prime Minister Neville Chamberlain, “In war, whichever side may call itself the victor, there are no winners, but all are losers.”

This story is designed to throw an everyday lens on some of the issues being discussed and debated by investors across the world; it is not research, so please do not interpret it as a recommendation. However, if something has piqued your interest and you would like to find out more or discuss what investments might be suitable for you, please contact one of our Investment Managers on 020 7337 0777.