Author: Jamie McGeever

ORLANDO, Florida (Reuters) – The only “winner” in a potential trade war between the West and China is likely to be the U.S. dollar.

Uncertainty over global trade policy is at its highest level since 2018-19, when clashes between former U.S. President Donald Trump’s administration and Beijing reached a critical point. It’s not yet close to those peaks, but it will be a focus as the U.S. presidential election approaches.

Whoever wins in November, further tariffs on Chinese imports and likely retaliation seem inevitable. China is already warning that Europe joining the tariff train would amount to a “trade war”.

Trump returning to the White House would significantly raise the stakes.

Rising protectionism and shrinking cross-border trade could stifle economic growth anywhere, but the United States – the world’s economic and monetary superpower – has layers of protection that other countries don’t have.

These include the relatively closed nature of the economy, the global importance of the US stock and bond markets, and the ubiquity of the dollar in international reserves.

This does not mean that the United States will not suffer – economic growth will snail-paced and inflation may rise. However, higher inflation delays or possibly eliminates Fed rate cuts, and growth in Europe and Asia would be more sensitive than in the U.S.

In low, the problems are likely to be more acute in other currencies, none of which also enjoy the dollar’s ​​safe-haven status. And in the world of exchange rates, everything is relative.

THREE TIMES MORE

Goldman Sachs economists sought to quantify the risks to U.S. and euro zone growth by analyzing the trade war in 2018-19 and beyond from three perspectives – comments by U.S. and European businesses on trade uncertainty, stock swings on tariff announcements, and investment patterns between countries.

They found that an augment in trade policy uncertainty to 2018–19 levels would likely reduce U.S. GDP growth by three-tenths of a percentage point. The estimated impact on economic growth in the euro area would be three times greater.

For a region that is already expected to grow much slower than the US, at just 0.8% this year and 1.5% next year according to the International Monetary Fund, this would be a major blow. There may be an aggressive easing of monetary policy by the European Central Bank, weakening the euro.

“Further increases in trade policy uncertainty pose significant downside risks to our global growth outlook in the second half of 2024 (H2F24) and in 2025 … with particular emphasis on economies where exports account for a larger share of GDP,” Goldman Sachs economists wrote on Tuesday.

ISOLATED

The U.S. economy is much less open than the European or Chinese economies, which means trade disruptions should have a relatively confined impact.

U.S. exports of goods and services accounted for 11.8% of GDP in 2022, according to the World Bank, compared with 20.7% for China. Eurostat data shows that goods exports from the euro area accounted for 20% of GDP last year.

The persistent and worsening trade deficit over the years was seen as a major drag on the dollar, as the United States had to borrow huge amounts of foreign capital to plug the gap and prevent the dollar from depreciating.

But the U.S. trade deficit was 2.8% of GDP last year, significantly lower than a year earlier and half of what it was in the mid-2000s. Onshoring, energy self-sufficiency and a push to revive domestic manufacturing suggest the deficit will no longer be the drag on the dollar it once was.

And that’s before any tariff escalation could further restrict imports into the U.S.

EURO PARITY?

China’s internal economic problems and geopolitical situation are enough to make foreigners afraid of investing in this country. But it is no coincidence that the inflow of foreign direct investment into China is falling at the fastest pace in 15 years, precisely as trade tensions intensify again.

Chinese stock markets are performing poorly, barely in the black this year and after the disastrous 2023. Beijing is trying to maintain the yuan exchange rate, which is at its lowest level in seven months against the dollar.

European stock markets and the euro have not reacted favorably to recent headlines regarding tariffs that Brussels is imposing on some goods imported from China. Given how close trade links are now between the eurozone and China, this should come as no surprise.

The eurozone imports more goods from China than anywhere else in the world, and the yuan’s trade-weighted share of the euro is comparable to the dollar’s weight. Trade tensions between China and Europe will hit the euro tough.

And given that the euro has almost a 60% share in the broader context, there is naturally a powerful inverse correlation between the fate of the euro and the dollar.

Deutsche Bank analysts predict the dollar will “remain stronger for longer” this year and next, although momentum may weaken as the cycle lengthens.

A more aggressive stance on trade from the winner of the White House in November would, however, be a significant positive for the dollar and would likely bring the euro back towards parity.

“The dollar is undervaluing the price of U.S. protectionism,” they wrote on Wednesday.

(The opinions expressed here are those of the author, a Reuters columnist.)

(Writing: Jamie McGeever; Editing: Paul Simao)