Trade war drag on world economy to fade in 2020

Bloomberg

The trade war’s drag on the world’s largest two economies will gradually fade in 2020 as tariffs on imports from China have likely peaked, according to Goldman Sachs Group Inc.
The recent progress towards a partial trade deal and expectations of an extended truce implies that this drag will disappear, which will also benefit the global economy, Goldman Sachs economists led by Jan Hatzius wrote in a note dated November 18.
This assumes there is no further escalation of tariffs.
The trade war is currently subtracting roughly 0.5 percentage point from sequential growth in both the US and China, according to Goldman’s estimates.
China’s economy has been on a gradual downward trajectory, with gross domestic product growth slowing further in the third quarter to 6%. Despite efforts by the government and central bank to stimulate the economy, growth is forecast to continue slowing to below 6% next year.
While investors have turned more optimistic this week, they remain sensitive to any developments on trade after months of closely watched negotiations. One challenge for stocks across developed markets lies in the MSCI World Index’s 21% advance this year, which has propelled the benchmark to its highest estimated price-earnings ratio since 2017.
Economists, finance ministers and business leaders all blame the trade war for worsening investment conditions. And there is ample indication that an end to trade conflicts would allow business investment to return to the higher trajectory of 2017 and 2018.
Meanwhile, Japanese Prime Minister Shinzo Abe’s push to ratify a partial US trade deal may have staved off President Donald Trump’s threat of auto tariffs — but that hasn’t stopped opposition lawmakers in Japan from questioning whether Abe cut a raw deal.
On Tuesday, the lower house of the Japanese Diet approved a limited US trade agreement that will harmonize digital trade rules and reduce barriers to Japan’s lucrative agricultural market. The accord is expected to pass the upper house of parliament before December 9.
The move came despite the criticism of some Japanese politicians who said the deal fails to remove the current 2.5% US tariff on Japanese auto exports and lacks a written guarantee that Trump won’t impose national security tariffs on Japanese cars.
It’s worth noting that a panel of US trade experts said Trump’s authority to impose national security tariffs lapsed in a separate but related Section 232 case because he failed act within the statute’s 180-day time frame.
Last week Trump called the Japan deal “just partial” and “only phase one.” So it’s too soon to say whether Abe made the right decision to capitulate in the face of Trump’s threat to target a $50 billion-a-year cornerstone of the Japanese economy.
But it certainly provides a helpful case study for the rest of America’s trade partners as they confront the Trump administration’s maximum-leverage approach to trade negotiations.