Escalating U.S.-China trade spat to hit Canadian business confidence, wallop global economy


Canadian business confidence will take the hardest hit from the rapidly escalating U.S.-China trade war, as Beijing and Washington prepare to exchange tit for tat tariffs at levels not seen since the Great Depression.

U.S. President Donald Trump raised levies on US$200 billion of Chinese goods to 25 per cent from 10 per cent on Friday even as 11th hour trade negotiations continued in Washington with Chinese Vice Premier Liu He. Meantime, “the process has begun” to impose additional 25 per cent tariffs on the remaining US$325 billion of goods imported to the U.S. from the Asian superpower, Trump said in a tweet.

China’s commerce ministry vowed to strike back with countermeasures, though it has yet to specify what steps it will take. U.S. President Donald Trump said he was in no hurry to sign a trade deal with China as negotiators ended two days of talks to try to save the agreement.

U.S. tariffs on more than US$500 billion in goods combined with Chinese levies and restrictions on American imports and investment would hike the total value of the dispute to roughly US$900 billion — a level not seen in generations, said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics in Washington.

“We have not had a trade war of that size since the Great Depression in the 1930s so this would be historic,” Hufbauer said. “There’s no one alive today who’s seen something like that and it will have serious implications for the global economy.”

Friday’s initial 25 per cent tariff hike will cost the U.S. economy US$29 billion by 2020 or 0.3 per cent of GDP, while the cost to the global economy will surpass US$105 billion, according to Oxford Economics. The U.S. economy will create 200,000 fewer jobs and growth will fall below 2 per cent in 2020.

A further imposition of tariffs on all U.S.-China trade would cut U.S. GDP and global output by 0.5 per cent by 2020.

There’s no one alive today who’s seen something like that and it will have serious implications for the global economy

Gary Hufbauer

“While negotiations are ongoing, and the possibility of a deal remains significant, a further escalation of trade tensions would have dire consequences for both protagonists and the rest of the world,” the firm said.

The ripple effects on Canada are expected to be more subdued, with an estimated 0.1 per cent shaved off of economic growth over the next year as a result of Trump’s latest measures, said Brian DePratto, senior economist at TD Economics. The current dispute will take a far sharper toll on the country’s already faltering business confidence.

“The challenge is that we have an economy growing at one to 1.5 per cent right now so we don’t have the buffer room that we might have had a year ago, ” DePratto said. “And if you look at recent business sentiment we were already seeing a softening at the beginning of the year. So we’re laying on a level of shock when a weakening of confidence was already there.”

The U.S. and China currently have tariffs in place covering some US$360 billion in bilateral trade.

A further escalation of trade tensions would have dire consequences for both protagonists and the rest of the world

Oxford Economics

Though the current U.S. levies mainly cover Chinese intermediate goods used in U.S. manufacturing, a second tranche covering all Chinese imports would affect more consumer goods like electronics, toys and sporting goods. That might create some new opportunities for Canadian firms to sell into the U.S., said Sal Guatieri, senior economist at BMO Capital Markets.

“But the probability is that will be swamped by the slowing of the economy of our major trading partner and a decline in purchases by consumers,” he said.

Trump’s latest trade measures still leave room for an agreement. Though the new 25 per cent duty applies to more than 5,700 categories of products leaving China after 12:01 a.m. EDT, goods shipped before midnight and arriving in the U.S. prior to June 1 are not subject to the tariffs — suggesting there is still time for a deal to be forged, Hufbauer said.

And with U.S. unemployment below 4 per cent and gross domestic product growing at 3.2 per cent in the first quarter, Trump won’t want to jeopardize the current strength of the economy going into the 2020 presidential elections, he said.

“Right now I think this is a negotiating ploy and there will be a truce in the next couple of weeks,” he said. “Trump doesn’t want to upset the glowing U.S. economy but as always with him, there’s still a chance he’ll go forward.”

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Source: Financial Post

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