While the tariffs being touted involve huge dollar value of the goods affected, the tariffs’ actual economic impact is quite minimal.
When really looking at the numbers, the negative impact only amounts to 0.43% of the combined gross domestic product (GDP) of the US and China. This too, only if the tariffs and US President Donald Trump’s threat of tariffs of an additional US$325bil are actually implemented.
When Trump first started the trade war with China in early 2018, markets went into a tailspin, particularly the Chinese market. Billions were lost in market capitalisation.
The fear back then was that the restriction of the free movement of goods could ultimately have a huge impact on global trade and surely slash off economic growth.
That did not come to pass.
Markets recovered when investors realised tensions were cooling, and that tariffs between the US and China barely dented the GDP of both countries.
While the dollar value of the tariffs appeared very large, the ultimate economic impact was minimal. The same can be said this time around.
Fisher MarketMinder said that the combined US and Chinese nominal GDP was US$34.1 trillion at end-2018.
The current tariffs total US$65bil, or 0.19% of the combined GDP. Last week, Trump raised pressure on Beijing to strike a trade deal by announcing he would increase tariffs on US$200bil of Chinese imports to 25% from 10%. This threat has since been imposed.
China retaliated with tariffs of its own. Chinese officials announced that they would jack tariffs up on a range of about 5,000 US goods worth US$60bil from 5% to 10% to 25%.
Trump also suggested the possibility of extending a new 25% duty on US$325bil worth of imports.
Thus, since last week, taking into account Trump’s and China’s new additional tariffs, the amount has increased to US$42bil (the US increased tariffs on US$30bil while China increased tariffs on US$12bil).
Putting things into perspective, US$42bil only amounts to 0.12% of US and China’s combined GDP.
The other fear is that if this tit-for-tat continues, Trump will target the remaining US$325bil in Chinese imports.
“Even if Trump enacts tariffs on the remaining US$325bil, the total would amount to 0.43% of GDP, which is not huge,” said Fisher MarketMinder.
These estimates also assume that the tariffs are paid in full and remain in place.
Well, these new developments do little to change Fisher MarketMinder’s expectation that 2019 will prove a great year for stocks globally.
“Wobbles come with the territory for stocks, and unfortunately, such moves are the price tag for their historically high returns.
“In our view, now is the time to remain calm. In the end, we expect cooler heads - and the bull market – to prevail, whether these tariffs remain in place or not. Overthinking every move in the tariff tango the US and China are dancing seems unnecessary to us,” it says.
Source: The Star