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France and Germany could be the biggest beneficiaries in an escalation in trade tariffs between the U.S. and China, Barclays economists have projected.
U.S. Commerce Secretary Wilbur Ross reiterated on Monday that President Donald Trump is "perfectly happy" to slap tariffs on the remaining $300 billion of Chinese imports if the world's two largest economies fail to agree a trade deal.
However, Christian Keller, head of economic research at Barclays, suggested in an analyst note that trade substitution resulting from additional tariffs, and other non-tariff related barriers, opens opportunities for core euro area economies to gain export market share.
"Our comparison of China's import structure across its main trading partners reveals that France, Germany and the U.K. are the closest 'U.S. proxies' in terms of relative sectoral decomposition of their exports to China," Keller's note said.
"We would therefore expect these countries to win the most if China opts to shop elsewhere."
Barclays' new baseline global trade scenario assumes a full-blown trade war which would see the U.S. impose a 25% tariff on "virtually all Chinese imports" and a Chinese retaliation, reducing bilateral trade by around 30%.
Keller's team expects a trade loss of 0.1% of euro area GDP (gross domestic product) in this instance, based on U.S.-China trade accounting for 1.6% of euro area value added (VA), which represents the difference between the cost of inputs to production and the price of output at any particular stage in the overall production process. However, he suggested this might be offset by trade substitution.
On a sectoral level, China's imports from the U.S. are concentrated in transport equipment, electronics and chemicals.
"Assuming market leaders in each sector would benefit the most from a 30% U.S. exports reduction, we estimate that the (euro area) could increase its exports to China by 0.1% of GDP, particularly in the automotive and, to an extent, the chemicals sectors," Keller's note said.
With the bulk of euro area exposure focused in Chinese exports of computers, electronics and electrical equipment and U.S. exports of transport equipment, the region's exposure to the trade war, and willingness to accommodate Chinese export diversions, could have "important political repercussions, particularly in light of faltering U.S.-EU trade negotiations," Keller projected.
Barclays is predicting that negative sentiment will have a much more significant adverse impact on the European economy, and sees the euro area more broadly "sailing into industrial recession" based on sliding industrial output figures and dwindling global business confidence.