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The new cold war and how it effects Europe

by S&P/planet-bpm.com In a first look at trade tariffs the U.S. and China have recently slapped on each other, economists at S&P Global Ratings believe the direct effects on the world's two largest economies are likely to be minimal—if the levies remain in place for the rest of 2019. However, the indirect macroeconomic effects are likely to be many, varied, and capture other trade-dependent economies in their nets like Europe and Canada. Willem Buiter, Economist and advisor of Citibank, speaks already from a "new cold war", that the Chinese are likely to win.

When you have no problems you create them

Beyond the macro level, the direct hits on specific sectors, lower-income consumers, and small and midsize enterprises with exposure to tariffs are likely to be sizable. Here are the key takeaways from our report published today, "The U.S.-China Trade War: The Global Economic Fallout": If the tariffs the U.S. and China have applied against one another remain in place for the rest of the year, the direct, short-term macroeconomic consequences in either country are likely to be minimal--unless household and business confidence tanks. That said, the more profound risks may lurk elsewhere. A meaningful slowdown in U.S. domestic demand from the trade dispute may lead to rate cuts. The Federal Reserve is in wait-and-see mode, but the chance of an "insurance" rate cut has increased. For China, the key risk is that the combined effects of investment restrictions, export controls, and tariffs will rewire supply chains and weaken manufacturing investment, particularly in the technology sectors driving growth.

Europe will lose, too

In Europe, the direct effects of U.S.-China trade friction will be felt in sectors with medium to high technological content like transport equipment, motor vehicles, rubber and plastics, chemical products, and pharmaceuticals. The indirect effects in Europe could be more detrimental, not least because it is increasingly dependent on trade, unlike China, and much more dependent than the U.S.
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