Only losers in trade war between the US and China

Farmers caught in the middle

Countries that are not directly involved in the trade war between the US and China are also confronted with economic losses. So concludes a new scenario analysis by RaboResearch about the US-China trade war. US soybean farmers will also feel the effects.

The study shows that trade wars generally cause economic damage, the majority of which falls on the countries directly involved, in this case the US and China. In a case of further escalation, open economies like the Netherlands would also see negative impacts. Hugo Erken, Senior Economist at RaboResearch: “Because of the trade war, Dutch exporters experience a competitive price advantage that improves their export position. But this effect is more than offset by lower growth in world trade, which means that a further escalating trade war also has a negative impact on the Dutch economy.”

Economist Björn Giesbergen explains the RaboResearch analysis: “In this study we make a distinction between two different scenarios. Our first scenario is regarded as the most realistic one and includes all protectionist measures that are currently implemented, or measures that we deem to have a high probability to be implemented going forward.”

The second scenario envisions a more extreme case: “Here we assume that the trade war will continue to escalate and that the US will levy tariffs on all imports from China – and China responds by taking firm retaliatory countermeasures. Both scenarios are compared with a benchmark scenario in which a trade war would not have occurred.”

Hugo Erken: “In our first, most realistic scenario, global economic growth in 2030 will be 0.7 percentage points lower compared to a scenario without a trade war. In our escalation scenario, global economic growth will be 2.0 points lower by 2030.”

China suffers a lot in particular

The study also shows that the negative impact of a continued trade war would be disproportionate for China. Trade is much more important for China’s further economic development than it is for the US – and less trade leads to productivity losses. Giesbergen: “In our first scenario, China would lose 1.6 percentage points of economic growth by 2030. In our second scenario, this would be 5.7, compared to 0.9 and 1.6 percentage points for the US.”

We can translate the GDP losses into an average impact. Erken: “The losses for China equate to 400 US dollars per Chinese citizen in the first scenario, which can increase to as much as 1,500 USD in our second scenario. For the US, the loss of wealth equals 600 USD per US citizen in the first scenario, escalated to 1,100 USD. Since the average US citizen is 3.5 times as rich as the average Chinese, the economic pain of the trade war weighs heavier for the Chinese than for the Americans.”

It should however be noted that these are average effects. Impact on individuals will be unevenly distributed: a banker in Manhattan will feel the adverse impact of the trade war far less than a farmer who grows cranberries or soybeans in the Midwest.

“The pain weighs heavier for the Chinese than for the Americans”

- Björn Giesbergen, RaboResearch

The RaboResearch results for the US are largely in line with findings from other studies, but the economists find a much larger impact on China in the event of a further escalation. “This is because we expect a relatively large depreciation of the Chinese currency against the US dollar and the fact that the trade war has a significant negative impact on productivity growth in China,” explains RaboResearch Economist Inge de Vreede.

She continues: “The concessions China made so far to the US have proved to be too limited to reduce tensions in the short term. Our expectation is that the tensions between both countries will continue for a longer period.”

Food and agricultural products in the crossfire

Also food and agricultural products have become weapons in the US-China trade war. Stefan Vogel, Head of Agri Commodity Markets: “Before, there was barely anything that was reliable in the grains and oilseed market but the fact that China would increase its soybean demand and imports every year. This is now changing.”

The global soybean trade has changed its rhythm. In the long term there are only two chances for US soybeans to flow to China again: 1) a US-China trade deal is agreed upon and implemented and China removes the import duties again, or 2) a drought in Brazil cuts production and export availability below Chinese requirements. Then China would have no other choice than to buy soybeans from the US.