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: Given different strategic goals, however, tensions will no doubt flare up again in future. Indeed, given US concerns over the competitive threat from the Made in China 2025 goals, we expect more controversial issues to linger for longer. Contagion channels
Below we present two alternative scenarios, where protectionist measures, such as trade tariffs, are more significant. We have estimated the impact on growth, inflation and monetary policy for the most relevant regions, which are the US, China and the rest of emerging Asia and the eurozone. Together, these regions represent around 2/3 of global GDP. 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.