Title: Global trade watch - Trade war scenarios - Insights
Headings: Global trade watch – Trade war scenarios
Global trade watch – Trade war scenarios
Introduction
Base scenario: Avoidance of a damaging trade war
Contagion channels
Negative scenario: Deepening US-China trade conflict
Worst case scenario: full-blown global trade war

Content: Before describing the alternative scenarios, we set out a number of channels through which protectionist measures can impact the economic outlook. To begin with, import tariffs instantly raise the price of the affected imported goods. As such it can be seen as a negative supply shock to the economy of the importing country, which raises prices and reduces economic growth in that country. In theory, some of the impact on growth and inflation could be moderated by substituting imports with domestic production, or by shifting towards imports from different countries of origin when not all countries implements tariffs. However, these processes take a considerable period of time and are not always possible, for instance if an imported good is of essential importance for a certain production process or there is no alternative country of origin. Consequently, import tariffs in general have an upward impact on production costs and/or consumer prices of the importing country. This will have a negative impact on company profits, fixed investment growth and private consumption growth. Secondly, the imposition of trade tariffs by certain countries can also have an impact on the economies of countries that are not directly affected by these tariffs, for instance if they play an important role in global supply chains. A lot of Asian countries are exporting intermediate goods to China in order to facilitate Chinese exports to the US. These countries will also be impacted by a US-China trade war.