Republicans have been attempting to head off a trade conflict. House speaker Paul Ryan’s spokeswoman noted that “we’re extremely worried about the consequences of a trade war.” And White House economic adviser Gary Cohn has summoned large end-users of aluminum and steel to meet with President Donald Trump.
Trump has said “no, we’re not backing down.” But beneath the rhetoric we see reasons to expect the economic and market fallout to be limited.
- Opposition from Republicans and the Trump administration increases pressure for compromise. The US has said there will be no country exclusions, but there may be exemptions. Trump has linked tariffs with NAFTA renegotiations. While this could backfire and undermine the talks, the room for compromise is clear. The US, for example, has a USD 3.6bn surplus with Mexico in steel trade, which may spur political opposition from US firms.
- We expect global GDP to accelerate to 4.1% this year, up from a forecast 3.9% in 2017. It would take a significant deterioration in trade to derail growth. Markets appear to be more focused on these supportive fundamentals: the S&P 500 has recovered all its tariff-induced losses.
- The EU has threatened retaliation, including targeting high-profile US brands like Levi's jeans and bourbon whisky. With an estimated value of just USD 3.5bn, this retaliation is politically rather than economically targeted.
Escalation remains a risk – we see a 20-30% chance of a full-scale trade war. But our base case remains that Trump will impose one-off tariffs for the benefit of specific industries, and that this will not cause a full-blown international trade conflict.