International credit rating agency Fitch Ratings has stated that the proposals for higher tariffs made by the US and Chinese governments are increasing the risks of a full-blown trade war, while it also outlined the potential risks of a global trade war.
Accordingly, Fitch stated that both the US and China would see gross domestic product (GDP) reduced by over two percentage points from the base line after two years with China being more affected. Other major economies including the euro zone, Japan and the UK would see lesser negative effects but still see growth deceleration.
In addition, market reaction to rising uncertainty could pose macroeconomic risks even before the tariffs' actual implementation. A significant Chinese currency depreciation, for example, would likely cause a shock to global markets and potentially affect investment and global trade flows.
However, should the proposed tariffs of the two countries be implemented, Fitch believes that the direct macroeconomic effects on trade, growth and confidence, both globally and for the US and China, would be limited. Fitch continues to forecast that US GDP growth will accelerate this year to 2.7 percent, with the short-term economic outlook improving alongside loose fiscal policy, wage growth and improved investment.
Meanwhile, the credit rating agency pointed out that no US-China tariffs have been implemented yet. The US' initially proposed $50 billion in tariffs are subject to a consultation process so the earliest tariffs are likely to come into effect at the end of May or in early June. As such, the tariff proposals may well be part of diplomatic positioning for negotiations and may never come into effect should a mutually agreeable deal be reached that addresses US concerns over the bilateral economic relationship.