World Economy

Tariff standoff probably won’t cause lasting harm — as long as there’s not an all-out bloodletting

Key Points
  • Experts say so long as the tariffs remain a tool in negotiations and don't escalate there is little to fear.
  • The U.S. is trying to bring down a $375 billion trade deficit with China.
President Donald Trump and China's President Xi Jinping leave after an opera performance at the Forbidden City in Beijing, China, November 8, 2017.
Jonathan Ernst | Reuters

The prospect of a full blown trade war between the United States and China — the world's two biggest economies — sounds scary for sure, but experts say there is little to fear so long as any tit-for-tat doesn't dramatically escalate.

On Friday, the White House is expected to unveil a revised list of between 800 and 900 products from China it will impose tariffs on. It could be worth $50 billion worth of goods, according to Reuters.

U.S. President Donald Trump is using the threat of a trade war to force concessions from Beijing, as the U.S. attempts to bring down its $375 billion trade deficit with China.

China has tried to appease Trump with offers to increase purchases of American products and the two sides have exchanged multiple visits of high-ranking officials in attempts to find common ground through negotiations, so far with little effect.

Economists and investors are watching developments closely but are mostly discounting the impact of the threat of tariffs, saying they will have a small impact as long as cool heads ultimately prevail.

"I think it's so-called noise," Frank C.H. Lee, senior investment strategist at DBS Bank in Hong Kong, told CNBC on Friday, stressing that the tariffs are a small percentage of the global giants' overall annual bilateral trade volume of more than $5 trillion.

China said its economy grew 6.8 percent in the three months to the end of March, beating economist expectations, and maintained the same rate of expansion for the third straight quarter.

Lee said that tariffs, even bigger than those proposed so far, might slow China's growth to as low as 6.6 percent, hardly a major blow to the world's second-largest economy.

"The figure is not important," he said of the tariffs, focusing instead on what he called the communication between the two sides and the frequent dialogue that has been carried out even amid the acrimony.

'Let negotiations continue'

Bhaskar Laxminarayan, chief investment officer for Asia at bank Julius Baer, agrees.

"It's one government wanting to have talks with another government," Laxminarayan told reporters Wednesday in Hong Kong.

"It's a way of getting dialogue going," he said. "It's a way of getting people back to a discussion table."

He said tariffs have no impact on things such as revenue, earnings growth or even global growth, saying effects from tax cuts, fiscal spending and other measures are far larger.

"Tariffs actually make no difference," he said. "Tariff is just noise."

Economists at Nomura in a research report Thursday said that tariffs proposed by both sides are expected to generate combined revenue of about $25 billion, or just 0.1 percent of gross domestic product.

"We think the most likely outcome will involve the US imposing the initial round of tariffs and a subsequent response from China before both countries pause to let negotiations continue," they said.

The main risks minus further escalation, they added, are to business confidence and financial conditions, especially after the US hit the European Union, Canada and Mexico with tariffs on steel and aluminum.

And while they said Trump could still decide to delay imposing tariffs on China, they also cautioned of a "worst case" scenario whereby the US comes back "aggressively" to China's expected proportional response.

"This situation poses the largest risk to the economic outlook as it could involve a spiral of escalating tariffs," they said.