Download full article

Trade wars: An old hope

Key points:

  • We believe the US has been using tariffs primarily as a negotiation tool; China appears a special focus. But domestic political motives also appear to be a driver.
  • We expect further tariffs hikes on Chinese products (including on an additional $200bn worth of goods). We expect tariffs on automobiles to be off the table for now.
  • In line with other studies, we find that most of the impact on growth would not come from the direct channel (trade) but from the associated tightening in financial conditions. The scope of the latter is difficult to model (here we use event studies), and is hence associated with large uncertainty.
  • In our central case tariff scenario, US GDP growth would be reduced by ¼ percentage points over two years and inflation higher by about 0.1ppt. This would not change our US Federal Reserve outlook.
  • In a risk scenario of a 10% blanket tariff on all US imports (and similar retaliation on all US exports), the impact would be around 1.4ppt for growth and 0.3ppt for inflation over two years. This would likely pause the Fed’s tightening cycle.
  • Conversely, successful trade negotiations could lead to more open global trade that would provide a modest boost to the growth outlook beyond our forecast horizon.
  • We additionally highlight the risk that ‘successful’ trade negotiations and a domestic political incentive may result in President Trump returning to this policy in future years.

The shifting tides of US trade policy

US trade policy has been a key market focus with wild swings in policy announcements contributing to market volatility for much of this year. Any attempt to assess the impact of trade policy on the US economy is hampered by the shifting scale of US protectionism in a fast moving policy environment. Moreover, with tariffs having generally trended downward for several decades there is little recent experience of the scale of the impact of tariffs on the modern, supply-chain-integrated economy.

In this paper we consider what is driving the US administration to pursue a policy that both economic theory and history suggest will result in material economic damage, both to the US and global economies. We hope that in understanding the motivation for this policy we might understand the likely scale of its enactment.

We then estimate the impact of tariff increases on the economy. We use an approach centred around the use of the Federal Reserve’s (Fed) macro model. Our results are consistent with the alternative approaches modelled.


This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document. Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

This document has been edited by AXA INVESTMENT MANAGERS SA, a company incorporated under the laws of France, having its registered office located at Tour Majunga, 6 place de la Pyramide, 92800 Puteaux, registered with the Nanterre Trade and Companies Register under number 393 051 826. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.


© AXA Investment Managers 2018. All rights reserved