The US-China trade frictions escalated further over the weekend and we are unfortunately moving away from the 'Grand Bargain' scenario towards the 'trade war' scenario.
While there are no winners in a trade war, the US is focused on protecting US technology and sees the tariffs on Chinese tech products as a legitimate action. China clearly disagrees, which is why we believe we are heading into a tit-for-tat scenario, in which we believe the US will soon raise the amount subject to tariffs to USD150bn.
The Chinese retaliation pattern shows that China intends to follow Donald Trump with 'equal scale and equal strength' on every move he takes against China.
Even if the amount subject to tariffs is raised to USD150bn, our rough calculations suggest it would not reduce global GDP by more than 0.2%. The calculations are very uncertain though and it is likely the effects would be front-loaded. This suggests downside risk to growth in the second half of 2018 and early 2019 but not a complete derailing of the global recovery.
Although not part of the US-China trade spat, Europe is looking fragile as growth has already slowed and the fiscal policy is less of a support compared with the US.
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