Trade war: risks have increased but Trump likely to constraint its policy - Rabobank

According to analysts from Rabobank, risks of escalation in US trade tensions have increased with this latest action and could do so even more with domestic political dynamics towards the mid-term elections. However, they expect that given the potential severe effect of a full-blown trade war, incentives are in place for Trump to refrain from triggering such escalation. 

Key Quotes: 

“US President Trump has crossed the Rubicon with his plan to lift duties on steel import of 25% and aluminum of 10%. Analyses of the US steel sector performance, however, shows that declining productivity growth is due to declining domestic investment in the US, whereas Europe chose to increase competitiveness of the steel sector by stepping up innovation. From an economic standpoint, it would be more sensible for the US to invest in the strength of its steel industry rather than to limit foreign competition.”

“Meanwhile, the EU has asked for exemptions, but has also suggested that it could retaliate the steel plan of Trump by imposing duties on typical American imports, such as jeans and bourbon. China’s response is muted for both economic and political motivations. Nevertheless, with Trump’s decision, the risk of trade tensions escalating into a trade war have increased. Rough calculations show that an outright trade war with across the board 20% additional import levies between the US and all its trade partners would especially hurt the US, which could face GDP losses of -6% up to 2023. This comes down to about USD 1,000bn and ironically equals the
amount Trump has vowed to invest in US infrastructure.”

“For China and the EU the impact would be far lower than in the US. Both China and the EU would have the opportunity to step up trade with each other and the rest of the world, as their relative competitiveness vis-à-vis the US increases. Given the expected severe impact of a full-blown trade war, our expectation remains that the US will want to avoid it and in the end will show constraint in its trade policy, although admittedly the risk of escalation has increased.”