Trying to predict the eventual outcome of the looming trade war between the US and China is about as difficult as trying to predict Donald Trump's next policy announcement. However, a reasonable prediction would be that neither side enjoys losing face, and therefore is unlikely to back down at the first hurdle.
For those that have missed it at 2 PM today America is due to slap a 25% duty on $34 billion worth of Chinese imports, ranging from machinery to electronic parts. As night follows day Tit is liable to follow Tat, meaning that China will immediately respond with equivalent tariffs focused on American farm goods.
While $34 billion seems a fair chunk to Hedge Clippings, they only represent about 0.1% of GDP for both the Titter (the US) and the Tatter (China). However the real risk lies in the Donald's approach to negotiation, and we would imagine China's approach to backing down. Assuming both parties perform as expected by most pundits, as opposed to how each hopes the other will react, it seems pretty likely that tensions, the damage to each country's economy, will increase.
However the US economy is in a very different place to China's, with a strong stock market, improving growth, and bond rates that in spite of dire predictions, and inevitable Fed tightening, seems not to have upset the apple cart (yet). Growth in the second quarter of the year is likely to exceed 3.5% annually, and unemployment is falling. Apart from the trade war, the major risk seems to be that there will in fact be an eventual outbreak of inflation, currently just above the FED's target of 2%.
Conversely, in China the equity market has fallen 20%, and the authorities are grappling to control credit. Over the past 20 years, having become the world's factory and having exported deflation as a result, a nasty trade war with the US could be the trigger to signal the end of the miracle.
Meanwhile, we assume the economy of all other countries, including Australia, caught in the crossfire will be considered collateral damage, although depending on who sides with whom, and who can negotiate what, will depend on the eventual outcome.
