UBS economists said Wednesday their prior assumption was wrong and they now believe the U.S. trade war with China is escalating and could hurt the economy. Their note followed the Trump administration's announcement Tuesday that it plans tariffs on a further $200 billion in Chinese goods.
The economists said they now see the potential for a trade war that could cause supply-chain disruptions, create inflation and bite into GDP.
They said they had expected just a list of new tariffs, but the U.S. Trade Representative is seeking an expedited process to impose the tariffs as part of its existing case. That means the supplemental action will have its own hearing Aug. 20-23 and could be implemented by the end of September.
"Once the administration implements the additional $200 billion in tariffs, the Chinese government will almost surely retaliate. On this path, the US government would then almost surely retaliate in response, raising the stakes immediately to $450 billion in imports of Chinese goods under tariff," they said in a note.
The UBS economists said the $50 billion was aimed to limit economic damage and alternative goods were available to replace impacted goods. "At $450 [billion], the list becomes comprehensive and supply-chain damage seems almost inevitable; many of the goods on the longer list are imported largely from China, making substitution essentially impossible. Such an escalation pushes the situation from a trade skirmish to a trade war," they said.
The economists said they had not included an escalation in their economic forecast, and the larger amount of tariffs would do economic harm, weigh "substantially on GDP growth and boost US consumer inflation."
The economists say there is a way to reach a positive outcome through negotiations, but with the escalation the path to resolving the disputes has "narrowed substantially."
The U.S. imposed tariffs on $34 billion in Chinese goods last Friday, and China retaliated with a like amount. An additional $16 billion in goods are expected to be tariffed under this first $50 billion round.
But the second round had come sooner than expected, with more detail. News of the new tariffs sparked a global equities sell-off Wednesday.
"While we now believe these new tariffs will be implemented, understanding their precise effects requires detailed analysis and a specific forecast of further actions both from China and the U.S.," they wrote.
Because the additional tariffs are supplemental to the first round, the negotiations would have to resolve the U.S. issues with Chinese IP practices. Negotiations between China and the U.S. had been moving along before the first round of tariffs, the economists noted.