Picture: ISTOCK
Picture: ISTOCK

Washington — A trade war between the US and China would probably take a bite out of the world’s two largest economies, economists predict, but not enough damage to pitch either into recession, provided it is contained.

The nations would suffer a reduction in output from the disruption in trade and higher prices that would result from a tariff battle, economists say. The damage could be compounded if the back-and-forth moves trigger a confidence-sapping swoon in global stock markets.

Yet even with all that, the betting is that both economies are strong enough to take the hit and keep growing soundly — unless the clash spirals out of control to include an ever-widening range of products, increasingly higher import levies and a complete collapse of equity prices.

"A trade war lite between the US and China does meaningful damage but doesn’t trigger a recession in either country," said Mark Zandi, chief economist at Moody’s Analytics in West Chester, Pennsylvania.

President Donald Trump plans to impose tariffs worth as much as $60bn on Chinese products as early as this week to punish Beijing for what the US perceives as intellectual property theft from American businesses, according to analysts.

The administration is said to be considering wide-ranging levies on everything from consumer electronics to shoes and clothing made in China, as well as restrictions on Chinese investments in the US

China has sought to play down the possibility of a confrontation with the US although the Wall Street Journal reported on Wednesday that Beijing is preparing to hit back with tit-for-tat tariffs.

Speaking on Tuesday at the end of the annual National People’s Congress, Premier Li Keqiang said the government planned to further open the manufacturing sector to competition and would not force foreign companies to transfer technology to domestic ones while doing so. "We don’t want to see a trade war," Li said.

Chinese policy makers appear to want to avoid a clash with the US and could offer to allow more foreign firms into the services sector in order to avert one, said Larry Hu, chief China economist at Macquarie Securities in Hong Kong.

The looming trade war comes against the backdrop of an $80-trillion global economy firing on all cylinders, projected by the IMF to expand at its fastest pace in seven years in 2018. It also comes as US growth is being buttressed by a double dose of fiscal stimulus in the form of lower taxes and higher state spending and while US inflation remains below the Federal Reserve’s 2% target. Economists say a tariff battle would pose a bigger threat to global growth than the import levies Trump has announced on steel and aluminium.

US retailers have warned that the imposition of tariffs on a broad range of Chinese imports would increase costs for American consumers. Zandi and Cornerstone Macro economists Nancy Lazar and Stephanie Roth predict that a tariff battle between the two countries would lift the US inflation rate by about 0.3 percentage points and depress monthly job gains by about 50,000.

Zandi said the hit to China could be greater, on the order of 0.9% of GDP, although Deutsche Bank economists expect the Asian nation to offset any impact through looser fiscal policy.

The risk, though, is that things escalate, with Bloomberg Economics estimating that a global trade conflagration could wipe $470bn off the world economy by 2020.

"Once a round of such tariffs and counter-measures are started, it can become very unclear when such tit-for-tat actions will stop," said Nelson Dong, former director of the New York-based National Committee on US-China Relations.

"That is the essence of the fear of a widespread ‘trade war’ due to such tariffs."