UN warns of currency wars and widespread protectionism if trade conflict escalates

Key Points
  • A report published by the UN Conference on Trade and Development outlined the potential impact of increased tariffs between the U.S. and China.
  • According to the report, only already strong economies would see any benefit from export opportunities.
  • The U.S. is due to increase tariffs on Chinese goods on March 1 if the countries do not reach a trade agreement.
China's President Xi Jinping and U.S. President Donald Trump
Fred Dufour | AFP | Getty Images

Currency wars, widespread protectionism and billion-dollar losses could arise if the U.S. and China fail to settle their trade differences before March 1, the UN warned in a new study.

Published by the UN Conference on Trade and Development (UNCTAD) on Monday, the report said that while some countries would see a surge in exports, negative global effects were likely to dominate.

China and the U.S. have been embroiled in a trade dispute since early 2018. In September, the U.S. added 10 percent tariffs on around $200 billion of Chinese imports, and it planned to increase those rates to 25 percent in January. However, both parties agreed to freeze these increases until March 1 while they engaged in talks.

Collateral damage

According to the UN report, continuing or hiking tariffs between the two superpowers would have an unavoidable impact on the "still fragile" global economy, including disturbances in commodities, financial markets and currencies.

"One major concern is the risk that trade tensions could spiral into currency wars, making dollar-denominated debt more difficult to service," UNCTAD's report said. "Another worry is that more countries may join the fray and that protectionist policies could escalate to a global level."

A currency war occurs when nations deliberately depreciate the value of their domestic currencies in order to stimulate their economies.

The report's authors noted that protectionist policies generally hurt weaker economies the most, while tit-for-tat moves of the trade giants would have a domino effect beyond their domestic markets.

"Tariff increases penalize not only the assembler of a product, but also suppliers along the chain," the report noted.

Chinese exports affected by U.S. tariffs would likely hit east Asian value chains the hardest, UNCTAD said, with an estimated contraction of around $160 billion.

International gains

Of the total $250 billion in Chinese products currently subject to U.S. tariffs, around 82 percent will instead be exported by firms in other countries, the study estimated. While 12 percent was estimated to be retained by Chinese companies, only 6 percent would be captured by domestic U.S. firms.

Meanwhile, of the U.S. exports subject to Chinese tariffs, about 85 percent would be captured by outside markets, UNCTAD estimated. The report said U.S. firms would likely retain less than 10 percent of those exports, while Chinese businesses would capture around 5 percent.

The countries expected to benefit the most were those that had the economic capacity to replace U.S. and Chinese firms. EU exports would capture $70 billion of U.S.-China bilateral trade, the report estimated, while Japan, Mexico and Canada would each gain around $20 billion.

The countries expected to see the highest percentage increase to their current total exports were Australia, Brazil and India.

"Because of the size of their economies, the tariffs imposed by Unites States and China will inevitably have significant repercussions on international trade," Pamela Coke-Hamilton, head of UNCTAD's international trade division, said at a press conference on Monday.

"While bilateral tariffs are not very effective in protecting domestic firms, they are valid instruments to limit trade from the targeted country. The effect of U.S.-China tariffs would be mainly distortionary. U.S.-China bilateral trade will decline and be replaced by trade originating in other countries."

Trade deal or no deal, the U.S. and China are still fighting for global power