By Jamie McGeever
ORLANDO, Florida (Reuters) – The only “winner” of a potential all-out trade war between the West and China will likely be the U.S. dollar.
Uncertainty around global trade policy is the highest it has been since 2018-2019, when clashes between former U.S. President Donald Trump’s administration and Beijing reached a fever pitch. It has yet to approach those peaks, but will be the focus of increased attention as the U.S. presidential election approaches.
Whoever wins in November, it seems inevitable that more tariffs will be imposed on imports from China and retaliation will be taken. China already warns that a decision by Europe to join the tariffs would constitute a “trade war.”
Trump’s return to the White House would significantly raise the stakes.
Rising protectionism and shrinking cross-border trade may slow growth everywhere, but the United States – the world’s economic and monetary superpower – has levels of protection that other countries do not.
These include the relatively closed nature of the economy, the global importance of US stock and bond markets, and the ubiquity of the dollar in international reserves.
That’s not to say the United States won’t suffer: Growth would slow and inflation could rise, but higher inflation delays or possibly eliminates the Federal Reserve’s interest rate cuts, and growth in Europe and Asia would be more vulnerable than in the United States.
In short, the pain is likely to be felt more acutely in other currencies, none of which have the safe haven status of the dollar. And in the world of exchange rates, everything is relative.
THREE TIMES THE BLOW
Goldman Sachs economists attempted to quantify the risks to U.S. and eurozone growth by analyzing the 2018-2019 trade war and beyond through three lenses: comments by U.S. and European companies about trade uncertainty, stock returns around tariff announcements, and investment patterns across countries.
They found that an increase in trade policy uncertainty to 2018-2019 levels would likely reduce US GDP growth by three-tenths of a percentage point. The estimated impact on euro area growth would be three times greater.
For a region already expected to grow significantly slower than the United States, at just 0.8% this year and 1.5% next, according to the International Monetary Fund, that would be a blow. This could be followed by aggressive monetary easing by the European Central Bank, which would undermine the euro.
“A further increase in trade policy uncertainty poses a significant downside risk to our global growth prospects in the second half of 2024 (second half of 2024) and 2025… with greater effects on economies where “Exports account for a larger share of GDP,” Goldman economists wrote Tuesday. .
CLOSED
The US economy is much less open than its European or Chinese counterparts, meaning trade disruptions should have relatively limited impact.
US exports of goods and services accounted for 11.8% of GDP in 2022, according to the World Bank, compared with 20.7% in China. Eurostat data shows eurozone goods exports last year were worth 20% of GDP.
A persistent and deteriorating trade deficit for years was seen as a major drag on the dollar, as the United States had to absorb huge amounts of foreign capital to plug the gap and prevent its decline.
But the US trade deficit last year was 2.8% of GDP, much lower than the previous year and half what it was in the mid-2000s. Offshoring, energy self-sufficiency and the push to reactivate national manufacturing indicate that the deficit will not be the burden on the dollar that it once was.
And that’s before any retaliatory tariff escalation further reduces American imports.
EURO PARITY?
China’s domestic economic problems and geopolitical stance are enough to make foreigners wary of investing in the country. But it’s no coincidence that foreign direct investment flows into China are falling at their fastest pace in 15 years just as trade tensions creep back in.
Chinese stocks are underperforming, barely in positive territory for this year and after a terrible 2023. Beijing is struggling to hold onto the yuan, which is at a seven-month low against the dollar.
European stock markets and the euro have not reacted favourably to recent headlines about tariffs Brussels is imposing on certain imports from China. Given how close trade ties between the eurozone and China currently are, this should come as no surprise.
The euro zone imports more goods from China than anywhere else in the world, and the yuan’s weight in the trade-weighted euro rivals that of the dollar. Trade tensions between China and Europe will hit the euro hard.
And since the euro has a weighting of close to 60% of the broader money market, there is a naturally strong inverse correlation between the fortunes of the euro and the dollar.
Deutsche Bank analysts predict the dollar will remain “stronger for longer” this year and next, although momentum could fade as the cycle drags on.
However, a more belligerent stance on trade by whoever wins the White House in November would be a major development for the dollar and likely push the euro back toward parity.
“The dollar is underestimating the risks of US protectionism,” they wrote on Wednesday.
(The views expressed here are those of the author, a Reuters columnist.)
(By Jamie McGeever; edited by Paul Simao)