Mohamed El-Erian isn't concerned about a global trade war but sees another major risk for the market

  • All the trade rhetoric from the U.S. and China is about the journey, not the destination, and the destination will not be global trade war, says Allianz's Mohamed El-Erian.
  • However, "It will get worse before it gets better," he says.
  • He sees the growing divergence between the U.S. and the rest of the world as the biggest risk to the market.

The trade war between the U.S. and China is not a major risk to the stock market, noted economist Mohamed El-Erian told CNBC on Wednesday.

In fact, he doesn't see it expanding into a full-blown, global problem.

"All this rhetoric you hear from both sides … it's about the journey, not destination. The destination, in my opinion, will not be global trade war," the chief economic advisor at Allianz said on "Closing Bell."

However, "It will get worse before it gets better. It's part of the process," El-Erian added.

The market has largely shrugged off the tit-for-tat tariffs between the U.S. and China announced this week. On Wednesday, stocks ended higher, with the Dow Jones Industrial Average closing up 159 points.

The Trump administration's most recent tariff announcement came on Monday in the form of a 10 percent duty on about $200 billion of Chinese goods. The tariffs will jump to 25 percent on Jan. 1.

In turn, Beijing slapped levies of between 5 percent and 10 percent on $60 billion worth of U.S. goods.

El-Erian said it will take time for the other side to realize that the "U.S. will win this war."

"As long as the U.S. is willing to incur damage, which it is, then ultimately it makes sense for others to provide concession," he said. "We've seen this with Mexico. We've seen this with Korea. We're going to see it with Canada and China; we'll see it down the road."

Instead of trade, El-Erian sees the major risk for the market in the next six to nine months coming from the growing divergence between the U.S. and the rest of the world both in economic performance and in monetary policy.

That will put pressure on interest rate differentials and exchange rates, he explained.

"The steps taken on the tax cuts and on deregulation are going to promote economic growth for at least two to three years," he said. "So the U.S. has a … policy-driven tailwind of growth. Japan and Europe, it's the other way around."

Disclaimer