By Jamie McGeever
ORLANDO, Fla. (Reuters) – The U.S. dollar may be the only “winner” from a potential all-out trade war between the West and China.
Uncertainty over global trade policy is the highest since 2018-2019 when clashes between the administration of former US President Donald Trump and Beijing reached their peak. The price is not close to those peaks yet, but it will be the focus of greater attention as the US presidential elections approach.
Regardless of who wins in November, more tariffs on Chinese imports and possible retaliation seem inevitable. China is already warning that Europe’s move to join the tariff train would constitute a “trade war.”
Trump’s return to the White House would raise the stakes significantly.
Rising protectionism and shrinking cross-border trade may weaken growth everywhere, but the United States – the world’s economic and practical superpower – enjoys layers of protection that other countries do not enjoy.
These reasons include the relatively closed nature of the economy, the global importance of U.S. stock and bond markets, and the prevalence of the dollar in international reserves.
This does not mean that the US will not suffer, but growth will slow and inflation may rise. But higher inflation will delay or perhaps cancel interest rate cuts by the Fed, and growth in Europe and Asia will be more vulnerable than in the US.
In short, the pain is likely to be most acute in other currencies, none of which enjoy the safe-haven status that the dollar does. And in the world of exchange rates, everything is relative.
three times the strike
Goldman Sachs economists tried to gauge the risks to growth in the United States and the eurozone by analyzing the 2018-19 trade war and its aftermath through three lenses — U.S. and European corporate commentary on trade uncertainty, stock returns around tariff announcements and cross-country investment patterns.
They find that a rise in trade policy uncertainty to 2018-19 levels would likely reduce U.S. GDP growth by three-tenths of a percentage point. The estimated hit to euro area growth would be three times larger.
For a region that is already expected to grow at a much slower rate than the United States, where growth will not exceed 0.8% this year and 1.5% next year, according to the International Monetary Fund, this would be a severe blow. This could be followed by aggressive monetary easing by the European Central Bank, which would undermine the euro.
“Further increases in trade policy uncertainty pose a significant downside risk to our global growth forecasts in the second half of 2024 (2H24) and 2025… with larger impacts in the economies where they are represented,” economists at Goldman Sachs wrote on Tuesday. Exports are a larger share of GDP. .
closed
The US economy is much less open than its European or Chinese counterparts, meaning any disruption to trade would have a relatively limited impact.
U.S. exports of goods and services accounted for 11.8% of GDP in 2022, according to the World Bank, compared with 20.7% in China. Eurostat data shows that eurozone goods exports last year were worth 20% of GDP.
The persistent and worsening trade deficit was seen for many years as a major drag on the dollar, as the United States was forced to absorb huge amounts of foreign capital to bridge the gap and prevent the dollar from falling.
But the US trade deficit last year was 2.8% of GDP, much smaller than the year before and half what it was in the mid-2000s. Reshoring, energy self-sufficiency and a push to revive domestic manufacturing all suggest that the deficit will no longer be the drag on the dollar it once was.
That’s before any tit-for-tat tariff escalation further reduces U.S. imports.
Euro equivalent?
China’s domestic economic woes and geopolitical situation are enough to make foreigners wary of investing in the country. But it’s no coincidence that foreign direct investment (FDI) flows to China are falling at their fastest pace in 15 years as trade tensions escalate again.
Chinese stocks have been weak, barely in positive territory this year and after a dismal 2023. Beijing is struggling to hold the yuan, which has hit a seven-month low against the dollar.
European stock markets and the euro have not reacted positively to recent headlines about Brussels’ tariffs on some imports from China. Given how close trade relations between the eurozone and China are now, this should come as no surprise.
The eurozone imports more goods from China than anywhere else in the world, and the yuan’s weight in the trade-weighted euro rivals that of the dollar. Trade tensions between China and Europe will certainly hit the euro hard.
Since the euro represents about 60% of its weight in the broader global economy, it is natural that there is a strong inverse correlation between the fate of the euro and the dollar.
Analysts at Deutsche Bank expect the dollar to remain “stronger for longer” this year and next, although momentum may fade as the cycle lengthens.
But whoever wins the White House next November, a more aggressive stance on trade would be a major positive development for the dollar, and could push the euro lower toward parity.
“The dollar undervalues the risks posed by US protectionism,” they wrote on Wednesday.
(The opinions expressed here are those of the author, a columnist for Reuters News Agency.)
(Writing by Jamie McGeever, editing by Paul Simao)