In immediate reactions to the twists and turns in China-U.S. trade talks, stock markets around the world have veered between sharp gains and losses. Short-term risks aside, the long-term damages on broader economic growth, especially to the United States, should have deterred the country's irrational unilateral moves.
The latest data showed the U.S. retail sales unexpectedly fell in April and industrial production also dropped, showing economic activity was slowing down and may decelerate further in the second quarter.
Commenting on the data, China International Capital Corporation Limited (CICC) expects U.S. growth in Q2 to slow to around 2 percent. Should uncertainties exacerbate, there is a possibility of growth dipping below 2 percent, the CICC added.
A major source of uncertainty came from the drawn-out China-U.S. trade talks. Just when investors had been cheering progress in the year-long negotiations, on May 10 the United States suddenly announced a decision to increase additional tariffs on 200 billion U.S. dollars worth of Chinese imports from 10 percent to 25 percent.
The unexpected move prompted China to adopt similar policies by raising the rate of additional tariffs imposed on some of the imported U.S. products from June 1.
The change of tone has rattled global markets and incurred higher risks to the global economy already fraught with uncertainties.
In an assessment of the likely economic impact, Mark Zandi, chief economist at Moody's Analytics, saw a 30 percent probability of a scenario in which negotiations continued and the higher 25 percent tariffs remained in place through the end of the year.
This would drag down U.S. real GDP growth by nearly half a percentage point to closer to 2 percent this year, with global supply chains disrupted, business investment and manufacturing output standing to hurt.
While the economist thinks China's real GDP growth will also be affected, Zandi added that Chinese authorities could ramp up economic stimulus to offset the ill effects of the trade tensions.
In the worst-case scenario (10 percent probability), a full-on trade war would be the recipe for a U.S., Chinese and global recession later this year.
Apparently no parties will emerge a winner from the trade friction, and there will be more to lose for the U.S. side as China has plenty of policy tools and adequate room for macro policies to tide over the possible difficulties.
UBS economist Wang Tao said in light of the trade tension escalation, the Chinese government would likely redouble efforts to support the domestic economy and anchor market expectation, and the additional tariffs would likely have smaller negative impact on business sentiment.
For the U.S. economy, the negative impacts from higher rates and expanded coverage of tariffs on Chinese goods would be larger, bringing further trouble to the country struggling with slowing demand.
As a separate report by CICC pointed out, U.S. domestic consumers and businesses will bear an increasing portion of the higher tariffs as the U.S. government adds more Chinese goods into the tariff lists.
Compared with the first list of Chinese goods subject to additional tariffs, the percentage of consumer goods increases significantly in the second list worth 200 billion dollars, and is even higher in the remaining 300 billion dollars worth of imports from China, according to the CICC.
Although China's share of U.S. total imports has declined since the additional tariffs took effect, it is unlikely the United States can fully replace Chinese goods with products from elsewhere, the report noted.
U.S. consumers and importers have already felt the sting. According to a study published by the London-based Centre for Economic Policy Research in March, U.S. economists estimated the additional tariffs raised the cost of the U.S. consumers and firms that import foreign goods by 4.4 billion U.S. dollars every month last year.
"Simultaneous slowdown in the U.S. and China, the world's first and second largest economies, may drag the global economy into another downturn despite initial signs of stabilization," the report said.
As the country which started and escalated the trade tensions, and which has the most to lose, the United States should reflect on their irrational policies and meet China halfway to work out a solution that serves the interest of all, analysts have said.
