If there is a full-blown trade war between the West and China, it is likely that the only “winner” will be the US dollar.
Uncertainty surrounding global trade policy is currently at its highest level since 2018-2019 when conflicts between former US President Donald Trump’s administration and Beijing peaked. Currently, the conflict has not reached such a level, but will increasingly become the focus of attention as the US presidential election approaches.
Whoever wins the election next November, the US will increase tariffs on imports from China and the possibility of retaliation seems inevitable. China has warned that Europe’s move to enter a spiral of tariffs would constitute a “trade war”.
If Mr. Trump returns to the White House, this risk will increase significantly.
Policy-related uncertainty index
Rising protectionism and shrinking cross-border trade could depress growth everywhere, but the US – the world’s economic and monetary superpower – is seen as having layers of protection that other countries do not.
That’s because of the relatively closed nature of the economy, the global importance of the US stock and bond markets, and the prevalence of the dollar as an international reserve currency.
That doesn’t mean the US won’t be affected – growth will slow and inflation could rise. But rising inflation will lead the Federal Reserve to delay or possibly eliminate rate cuts, and growth in Europe and Asia will be more vulnerable than in the US.
In short, the “pain” caused by the tariff war will likely be felt more deeply in other currencies, none of which have the same “safe haven” role as the US dollar. And in the world of exchange rates, everything is relative.
Impact on US and Eurozone economic growth
Goldman Sachs economists tried to assess the risk of a “trade war” for US and eurozone growth by analyzing the 2018-2019 trade war and going through three lens – commentary from US and European businesses on trade uncertainty, returns to the stock market around tariff announcements and cross-border investment patterns.
They found that if trade policy uncertainty increased to 2018-2019 levels, it would reduce US GDP growth by three-tenths of a percentage point. The estimated impact on euro area growth would be more than three times larger.
For a region predicted to grow significantly slower than the US, at just 0.8% this year and 1.5% next year, that would be a blow, according to the International Monetary Fund. big shock. Aggressive monetary easing from the European Central Bank is likely to follow, weakening the euro.
“Further increases in trade policy uncertainty pose a significant downside risk to our assessment of the global growth outlook for the second half,” Goldman economists said. 2024 and 2025. … In economies where the proportion of exports in GDP is larger, the impact will be stronger.”
Increased trade uncertainty could dampen GDP growth in the US and the Eurozone.
The US economy is more closed than other major economies
The US economy is much less open than the European or Chinese economies, meaning trade disruptions would have a relatively limited impact.
According to the World Bank, US exports of goods and services will account for 11.8% of GDP by 2022, compared with 20.7% for China. Eurostat data shows that eurozone goods exports were worth 20% of GDP last year.
The persistent and worsening trade deficit that has been going on for years is seen as a major drag on the dollar as the US has to absorb huge amounts of foreign capital to close the gap and prevent the dollar from falling.
But the US trade deficit in 2023 is 2.8% of GDP, much smaller than the previous year and only half of what it was in the mid-2000s. Also, energy self-sufficiency and recovery efforts Domestic production shows that the US deficit will no longer be a major drag on the dollar as before. On the other hand, any escalation of tariff tensions is likely to further reduce US imports.
Impact on the euro
China’s domestic economic problems and geopolitical stance are enough to make foreigners wary of investing in the country. But it is no coincidence that foreign direct investment flows into China are falling at the fastest rate in 15 years just as trade tensions are rising again.
Chinese stocks are underperforming, barely rising this year after a poor showing in 2023. Beijing is trying to prop up the yuan, which is at a seven-month low against the dollar.
European stocks and the euro did not react positively to recent news about tariffs imposed by Brussels on some imports from China. Given the current close trade relationship between the eurozone and China, this is not surprising.
With the eurozone importing more goods from China than anywhere else in the world, trade tensions between China and Europe would hit the euro hard.
And with the euro having a weighting of nearly 60% in the dollar index, there is a naturally strong inverse correlation between the ‘fate’ of the euro and the dollar.
Deutsche Bank analysts expect the dollar to be “long-term bullish” this year and into next, although momentum could fade as this bull cycle drags on.
However, the tough stance on trade of whoever wins the White House next November will be a positive development for the USD and could push the euro down to parity with the USD.
