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: Moreover, when tariffs are imposed on certain good their prices excluding tariffs tends to fall. This means that the import prices of the importing countries that are not directly subject to the tariffs tends to decline. Thirdly, business confidence can be hit by the uncertainties surrounding the implementation of protectionist measures and its potential impact on economic growth. If these negative confidence effects last for a while, they can spill-over to domestic demand, particularly investment. Cross-border FDI flows will likely also be hurt in case of rising uncertainty. Also, sentiment in financial markets can be hit, resulting in drops in the price of risky assets such as stock prices. This will lead to wealth effects impacting domestic demand and a tightening of financial conditions. Finally, the impact of trade tariffs on the economy and inflation will also depend on the reaction functions of central banks. Theoretically, the short-term rise in inflation could induce banks to tighten policy. However, this would exacerbate the effects on economic growth.