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The $2 Trillion Trade War Fallout

Washington

Fitch Ratings warned on Tuesday that increased trade tensions have raised the risk that new measures may be taken that would have a much greater impact on global economic growth than those enacted so far—to the tune of halting $2 trillion in global trade flow.

It’s a horrifying scenario, and one that Fitch warns could come about if the U.S. imposes auto tariffs on China, the EU, Mexico and Canada, prompting them to retaliate in kind, as they have done over steel and aluminum tariffs.

The Trump administration tariffs on up to $50 billion on Chinese products and Chinese tariffs on $34 billion of U.S. goods are expected to kick in on Friday.

U.S. President Donald Trump also recently issued a threat of an additional $200 billion in tariffs on Chinese imports. That could prompt China to apply tariffs to all imports of goods and services from the US, which were worth $188 billion last year. 

Whether this scenario will play out or not depends on how much of Washington’s threats are bluster for more leverage—and not even Trump would appear to know that because this is all going down on the fly.

Late last month, Trump started waging a war on the auto industry, threatening a 25-percent tax on automobiles imported into the U.S. from Mexico and Canada, and a 20-percent tax on all European cars coming in. Related: Venezuela Gets A $5 Billion Lifeline

He has directed the Department of Commerce to begin an investigation into imported autos under Section 232 of the Trade Expansion Act, which could result in a tariff of up to 25 percent. Section 232 is designed to give the president power to restrict imports of goods if there is a compelling national security reason.

U.S. imports of new cars and car parts that were worth $322 billion last year. 

Even the U.S. Chamber of Commerce is launching a campaign to oppose Trump’s tariff policies, and it’s a lobbying behemoth that could possibly step in to save the day. “If this proposal is carried out, it would deal a staggering blow to the very industry it purports to protect and would threaten to ignite a global trade war,” said Thomas J. Donohue, the president of the U.S. Chamber of Commerce.

President Trump himself also believes that auto trade war may be even bigger than the one over steel and aluminum.

“I’m going to tax their cars coming into America and that’s the big one. You know, the cars are the big one. We can talk steel, we can talk everything: The big thing is the cars,” Trump recently stated.

The European Union said that if tariffs on auto imports are implemented it could lead to  retaliation against some $300 billion in U.S. goods, thus fulfilling Fitch’s prophecy.

Automakers like Toyota and General Motors said any tariffs would significantly increase the price of cars sold in the US and depress sales and that entire North American industry could be irrevocably harmed.

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Industry experts and automakers warned that Trump tariffs could add up to $5,000 to price of new vehicle in U.S. Even US made cars, which use a significant percentage of imported parts, would have higher sticker prices.

Aside from trillions in global trade, Fitch expects a “shock” of 35% to 40% on U.S. import prices and about 0.5 percentage point negative impact on U.S.’s gross domestic product growth.

Trump doesn’t care if the auto industry is miffed, but the Chamber of Commerce certainly does, and will heed Fitch’s warnings. It’s launched a major campaign backed by more than 3 million American businesses.

By Tom Kool for Safehaven.com

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