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Will the U.S.-China trade spat escalate into a trade war?

WEEKLY MARKET COMMENTARY  | 

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Over the past several weeks the possibility that trade frictions between the U.S. and China could spill over into a full blown trade war has increased significantly. While we would argue that we are still in the early innings of a trade spat and not a trade war (see What does a trade war really look like?), the combination of macroeconomic and microeconomic distortions that are associated with trade spats and trade wars should not be discounted and ongoing trade interactions with China will be closely watched in the week ahead.

Diplomatic and economic interactions between the Trump administration and China are, for now, best described as “open mouth operations” and are well short of an all-out trade war. Even so, the economic effects and price distortions for the middle market economy are potentially significant. If the trade interaction deteriorate further, middle market businesses should anticipate that the large firms in the upper end of industry ecosystems will begin passing price increases downstream. This would put at risk the expansion in revenues and profit margins that have been a hallmark of the real economy for most of the past 18 months.

The industrial ecosystems that would be most negatively impacted by the implementation of proposed tariffs and possible retaliatory measures from China and other countries are agriculture, manufacturing, chemicals and energy.

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