STOP LOSS

The US-China trade war could erase all the market gains since Trump was elected

It’s anyone’s guess how bad the current US-China trade spat will get. Analysts at UBS have estimated what could happen if the current skirmish becomes an all-out trade war. It’s bad.

A full-blown trade war would include 30% tariffs on all Chinese imports (except smartphones) in the US, a proportional response in China to US goods, and a 25% tariff on all imported cars in the US, with an equivalent retaliation to American cars around the world. In that scenario, UBS forecasts that global growth in 2018 would decline to 3%, from its current estimate of 4%, with the biggest downward revisions to growth in the US and China.

Across all markets, the decline in growth would come from higher inflation—again, the pinch would be worse in the US and China than elsewhere. In the event of an all-out trade war, oil prices are forecast to drop by $25 per barrel due to lower demand, which isn’t good news for US oil producers. The US is forecast by some to become the world’s largest oil exporter next year.

The impact on stock markets would be severe, with the US, European, and Asian (excluding Japan) markets down by 21%, 25%, and 24%, respectively, according to UBS.

UBS says things could get dicey in September and October, when the next round of retaliations between China and the US may take place. If China uses its US Treasury holdings or currency as weapons, or the US hikes tariffs to 30% on all Chinese imports, that will mark the start of the analysts’ all-out trade war scenario. Coming in the home stretch of US mid-term election campaigns could add extra volatility, to say the least.

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