Tensions on trade have gone up a notch: Donald Trump explicitly threatens China and Europe with higher tariffs on more products. China and Europe are accused of not respecting the rules of the game and thus causing the US trade deficit. Even though this argument is not valid, it is unlikely that the US President will abandon his strategy before the mid-term elections. At this stage, the products targeted by tariff increases represent too little of international trade to have an impact on growth. Thus, unsurprisingly, so far we haven’t seen trade tensions have a significant impact on domestic demand, except for the decline of some business surveys.
It is important to note that even in the absence of a global trade war, an uncertain environment can affect trade between countries. We should reiterate that among the identified causes of the slowdown in global trade after the Great Financial Crisis, we note less trade liberalisation compared to the 1990s and 2000s; the rise of non-tariff barriers, particularly in emerging countries; and maturing global value chains. Added to this is uncertainty about the tariff environment, which some studies show tends to have a direct negative impact on trade (through a higher risk of disrupting global value chains for instance). In other words, the climate of uncertainty alone is able to slow down trade. In April – before the announcement of protectionist measures – we observed a significant decline in world trade (‑2.4%, 3m / 3m, at annual rate), without clearly identifying the cause. Rising by 3.8% yoy (3-month moving average), world trade now tends to grow less rapidly than global GDP.
As such, even without an outright trade war, international trade (goods) may slow further. Against this backdrop needless to say that, more than ever, domestic demand is the cornerstone of the global economic expansion.