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July 2019 - The escalation in global trade tensions over the last year has
become a focal point of the world economic outlook. The growing trade dispute
between China and the US takes centre stage, with $360bn of bilateral goods
trade between the two economies being subject to increased tariffs.

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The
risk of a further escalation in global trade tensions is elevated, especially after the
breakdown of US-China negotiations in May 2019, and the subsequent hike in
bilateral tariffs shortly after. Divergent strategic aims on industrial policy
and technology between the US and China create significant risk the trade
dispute evolves into a full-blown trade war. US trade tensions with other
economies have also risen, albeit to lesser degree. Nevertheless, the risk that
these tensions result in a multilateral trade conflict cannot not be ignored.

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In
a trade war scenario, the world economy would slow sharply, growing at the
slowest rate since the global financial crisis. We explore a scenario where the US
implements a range of additional tariffs on China, and its other partners. In
the short-term, the impact on financial markets and global demand is severe,
with world growth falling 0.1ppt and 0.9ppt below the baseline (of no further
tariff hikes) in 2019 and 2020 respectively. The subsequent recovery remains
sluggish even in the later stages of the scenario as productivity growth is
reduced in the economies heavily impacted by increased in tariffs.

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The trade war spreads across Asia
through trade and financial channels. Our simulation tracks the transmission
of the shock from a US-China, US-Europe and US-Global (auto sector) trade war.
Firstly, through direct trade channels, and associated second-round effects on
investment. And secondly, for countries which require capital from overseas to
fill current account deficits and support economic growth, the trade war
results in a withdrawal of capital, tightening financial conditions and
undermines domestic demand in these economies.

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Taiwan is amongst the hardest-hit
economies in Asia in the trade war scenario. With deep integration to China's supply
chain and high levels of domestic value add in its exports, Taiwan's economy
feels an immediate impact from the trade war, losing 1.5% of GDP versus our
baseline forecast (of no further tariff hikes or cuts) by 2020. The long-run
impacts are almost twice as great. Government
debt rises by around 3% of GDP into the long run, and the stock market loses
more than 10% versus the baseline.

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Impacts elsewhere in Asia also matter. Taiwan is not the only
economy severely dented by the trade war -- South Korea feels similar (albeit
very slightly lesser) GDP impacts through the 2019-2024 period, and even
less-impacted economies lose 1.5-2pp over this horizon. There are permanent
wealth losses through stock market falls, and a loss of around 1.3m jobs
compared to the baseline across our sample of six economies.

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Report
is commissioned by Flat Globe Capital and written by Oxford Economics.