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Who would win a trade war?

| Posted by: Paul Donovan | Tags: Paul Donovan Weekly

We do not have a trade war (yet). Despite the tweets, trade policy is not cutting the share of trade in the global economy. US tax cuts mean that the US trade deficit is likely to be bigger this year.

If the trade squabble becomes a trade war, who wins? Economically the answer is easy. No one wins a trade war.

It is not true that countries with trade deficits win a trade war. Running a trade deficit means that a country has a higher standard of living than it would with balanced trade. The US is not an obvious winner from a trade war.

If no one wins, the question may be who loses least?

The EU may lose least from a trade war. As the world responds to US trade taxes by taxing US exports, European exports are often the obvious alternative. Further, the more isolated US has shown signs of retreat from leadership on global regulation. In several key areas, it is the EU that is now writing the rules. Asian and US companies increasingly use EU rules on the environment, data, and other areas. Controlling the rules of trade may give a competitive advantage in the future.