US-China trade war to worsen before breakthrough, economists say

Tariff war looks increasingly like the IMF’s worst-case scenario for a global economy, according to experts

US President Donald Trump is ratcheting up tension over tariffs. AFP 

Economists expect the trade war between the world’s two largest economies to get worse before it gets better - culminating in a deal by year-end.

President Donald Trump on Friday increased tariffs on $200 billion in Chinese goods and the Asian nation retaliated, prompting traders to price in a US interest-rate cut this year and sending global stocks plunging. A Bloomberg News survey on Monday showed a majority of 40 economists see Mr Trump following through on his threat to impose additional 25 per cent tariffs on all remaining imports from China, with a plurality expecting those higher levies by the third quarter.

“Both sides want a deal but there will be more escalation and more tension before they get a deal,” said David Sloan, senior economist at Continuum Economics, who sees a trade pact reached this year and higher tariffs imposed by the third quarter.

“It is in the economic interest of both sides to reach a deal,” Mr Sloan said. “This will hit the US economy significantly and probably the Chinese economy even more.”

Underscoring that sentiment, Mr Trump on Monday warned China against taking steps to substantially retaliate. He also said he’s planning to meet with Chinese President Xi Jinping at next month’s G20 summit, and Treasury Secretary Steven Mnuchin signalled that talks are better than markets assumed. Bloomberg’s survey concluded just as the US Trade Representative’s office released a list of about $300bn of Chinese goods including toys and phones that Trump has threatened with as much as a 25 per cent tariff.

Overall, the trade war is increasing the chances of an even worse scenario. Four-fifths of economists surveyed say that higher tariffs heighten the risk of a recession in the US by the end of next year. While first-quarter economic growth blew past estimates, the expansion is forecast to cool as the boost from tax cuts wears off and global demand slows. That kind of scenario - tariffs dragging down already-weaker growth - could encourage the Federal Reserve to cut interest rates, according to almost half of the respondents.

The latest breakdown in talks has prompted an escalation in the tariff war that looks increasingly like the International Monetary Fund’s worst-case scenario for a global economy already forecast to grow this year at its slowest rate since the immediate aftermath of the 2008 financial crisis.

Two-thirds of economists see a trade agreement between the US and China this year, while almost a fifth expect one by 2020. Five economists, or 13 per cent of respondents to the question, don’t expect a deal for at least another five years.

Just over half see the US imposing 25 per cent tariffs on all remaining imports from China; 30 per cent estimate no additional tariffs and 18 per cent see additional tariffs, but at a rate below 25 per cent.

Of those who expect higher tariffs from the US, two-thirds expect them to be imposed in the second or third quarter

Fed reaction expectations are split: the largest share, 45 per cent, say tariffs on the remaining imports from China make the central bank more likely to cut rates, while 25 per cent say they’ll lean towards holding rates and 23 per cent see no effect on policy.

Bloomberg polled analysts who mainly follow the US economy