Fallout From Tariff Protectionism Negligible, But Non-Tariff Restrictions Could Be More Serious

Donald Trump’s protectionist moves may have attracted retaliation from China, but analysis by trade credit insurer Euler Hermes concludes that the most likely outcome is an increase in world import tariffs of less than 0.5 percentage points.

Euler Hermes arrived at this estimate based on its observation that “initial threats from the US were generally followed by negotiations and exemptions,” the magnitude of the exports at risk for the US and China, at US$30 billion a year, is less than 0.1% of global trade of goods and services, and the 4.8% rise in global trade volume in 2017.

“These sound like good reasons to take markets’ anxiety with a pinch of salt,” the insurer concludes in a report, “Trade Games, Trade Feud or Trade War?”, which evaluates the impact of higher US tariffs on global trade in 2018 and 2019.  

But non-tariff measures could be more serious. “While less tweeted about, other forms of protectionism (Financial, Regulatory, Data, Currency, Environmental, Sanitary, Security, and Intellectual Property) could be even more disruptive,” warns Alexis Garatti, Head of macroeconomic Research at Euler Hermes.

“On the financial risks side, capital controls and currency manipulation should be monitored should tensions escalate between the US and China.”

Three scenarios

Euler Hermes’ economic research department considered three scenarios: Trade Games, Trade Feud and Trade War.

Trade Games, the baseline scenario, corresponds to a mild increase in the average tariff by +0.5 percentage points, from 3.5% today in the US, and assumes negligible retaliation. “This is the unfolding situation, following the announcements, and the scenario we consider to be the most likely,” says Euler Hermes.

The second scenario, Trade Feud, assumes substantial retaliation by China and corresponds to an increase of +2.5 percentage points that will bump US import tariffs to 6% and imports tariffs in the rest of the world to 8%. Euler Hermes considers Trade Feud unlikely at this time, as the US and China intensify trade talks.

Trade War is a very unlikely scenario, in Euler Hermes’s reckoning. It corresponds to an increase of tariffs globally by +8.5 percentage points, bringing US import tariffs to 12% and 14% in the rest of the world.

“The bilateral version of this scenario would mean a 45% tariff on all Chinese imported products, which echoes what President Trump used to say on the campaign trail,” notes the report. “This situation has not happened since the mid-60s.”

At-risk industries

A separate analytical product, the Euler Hermes Protectionism Tracker, looked at the most at-risk industries. Based on an analysis of the major contributors to the US trade deficit, these are:

China: Industrial and electrical machinery, optical equipment, vehicles (railway, aircraft), chemicals (including pharmaceuticals) and metals (steel and aluminum, mainly).

US: Aircraft, cars, chemicals and agri-food products (including soybeans, cereals, beef).

Mexico, Germany, Japan and Canada: Automotive, machinery and equipment, electrical and electronic equipment.