Trade tensions remain greatest risk to global economy


As the first half of 2019 progressed, all signs pointed to a resolution to the trade dispute between the U.S. and China, leading to potentially stronger growth in the back half of the year. This view was based on the belief that the leaders of the world’s two largest economies would be motivated to come to a deal. President Donald Trump would be looking for a strengthening U.S. economy heading into the 2020 election season, while Chinese President Xi Jinping would want to claim a political victory ahead of the celebrations to mark the 70th anniversary of the founding of the People’s Republic of China later this year. As we assumed, China has begun to stimulate domestic demand in response to rising uncertainty and a weakening economy.

However, Trump dropped a bombshell in early May by announcing the U.S. would increase the tariff rate on $200 billion in Chinese imports from 10% to 25%. He also threatened additional tariffs on all remaining Chinese imports, an estimated $250–$325 billion in goods. China retaliated by announcing it would raise tariffs on $60 billion in U.S. goods.

Furthermore, Trump threatened to impose tariffs on imports from Mexico to force the country to curb the influx of migrants from Latin American countries.

These actions have caused us to revisit our global gross domestic product (GDP) forecast. We now forecast global growth at 3.2% in 2019 with risks to the downside, a slight downtick from our estimate 1Q of 3.3%.

As anticipated, the G20 Summit in late June provided an opportunity for both sides to call a temporary truce in an effort to return to the negotiating table. Trump and Xi emerged from their meeting with an agreement to delay any new tariffs on U.S. and Chinese products and resume trade talks. We still believe a trade agreement will happen before year-end. However, we also anticipate the intensifying rivalry between the U.S. and China will be with us for some time.

In addition, Trump’s position on Mexico occurred while legislatures in the U.S., Mexico and Canada worked toward ratification of the U.S.-Mexico-Canada Agreement (USMCA), the replacement for the North American Free Trade Agreement.

Mexico became the first country to ratify the trade deal and USMCA is not expected to face insurmountable hurdles in Canada. The path to ratification in the U.S. could be rockier as the Democrat-led U.S. House of Representatives wants the deal to be altered to address key provisions on labor and environmental standards.

We believe USMCA will likely be ratified in the U.S. by the end of the year, but at what cost? Trump’s reliance on tariffs as a negotiating tactic may have shaken the confidence of U.S. trading partners, as it shows that tariffs can be implemented even if a framework on a trade deal has been reached. We also believe it could make China hesitant to strike a deal with the U.S., knowing there’s a possibility Trump could announce tariffs even if an agreement was in place.

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