The U.S. will survive a full-blown trade war with China and the economic consequences are less troubling than some investors fear, according to Wells Fargo Securities senior economist Tim Quinlan.
“It’s fair to say that a trade war with China alone is not going to bring the U.S. economy to its knees,” Quinlan told Yahoo Finance,
U.S. exports to China account for less than 1% of U.S. GDP, according to a new research note by Quinlan and his colleagues at Wells Fargo. The U.S. Department of Commerce Bureau of Economic Analysis estimates GDP in the first quarter of 2019 is running at $21.06 trillion. The value of U.S. exports to China was $120 billion last year, almost $10 billion less than 2017 when it was $130 billion. Quinlan blames the drop in value on retaliatory tariffs imposed by China after the U.S. imposed tariffs on imported Chinese goods. Quinlan said the real threat from a failure to avert a trade war is to the larger global economy.
“If I looked at a 20-year chart of the global trade volumes the only time that year-over-year trade volumes fall into negative territory in the past is when the U.S. economy is in recession,” Quinlan said.
Quinlan concedes businesses closely tied to global trade and China obviously stand to lose from a continued trade dispute. But he said the global economy stands to lose more because indirect effects would amplify the slowing effect on the world’s economic growth. He points to the way stock markets around the world reacted negatively to Trump’s tweets indicating the U.S. might raise tariffs on imported Chinese goods.
“Generalized weakness in financial markets a la last December would represent a tightening in financial conditions that could lead to slower economic growth,” he wrote.
The Chinese could also raise tariffs again in retaliation which would raise prices in the U.S. and place upward pressure on inflation. However, Quinlan and his colleagues said the Federal Reserve would pay close attention to “any slowing effect that the trade dispute would impart on the economy.” That could possibly lead to an eventual cut in interest rates, they said. But the Fed is in wait and see mode with no guarantees, Quinlan pointed out.
Adam Shapiro is the co-anchor of Yahoo Finance’s On the Move.