Will Trump’s tariffs kill global trade?

Investing.com -- President Trump’s tariffs are feared by many to be the catalyst for deglobalisation, threatening to upend decades of painstakingly built global trading ties. But Capital Economics isn’t convinced the world is heading for a wholesale retreat. Instead, the research house argues the most likely scenario is a decoupling into US- and China-led blocs, rather than a collapse in global trade.

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While Trump’s proposed tariffs could deliver a meaningful hit to global commerce, Capital Economics sees the impact as significant but contained. “Trump’s tariffs will cause real goods trade to fall by around 1% in the next two years, both by introducing frictions into the trading system and by causing global demand to weaken,” Capital Economics analysts said in a recent note.

The analysts estimate the effective US tariff rate would jump to around 10% for most countries and 40% for China, but much of the drop in US imports from China would be offset by increased imports from other Asian economies, including India, and by China redirecting exports elsewhere.

While globalisation may have peaked, a dramatic unwinding is unlikely without much broader protectionist moves or significant retaliation, according to Capital Economics. “A lot of the fall in US imports from China will be offset by a rise in imports from elsewhere, while China’s exports will be redirected to other economies. So we think a reasonable base case is for goods trade as a share of GDP to remain around 45%."

The more likely scenario is a “splintering into US- and China-led blocs,” with the US bloc representing the lion’s share of global GDP and the China bloc comprising a larger population but far less economic heft. “China has a large number of countries in its camp, but most are small in economic terms… China still relies far more on the West for both final demand and inputs,” the analysts added.

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