The growing trade battle that broke out in early 2018 between the United States and the People’s Republic of China (PRC) means GDP could fall by as much as 1% in PRC and 0.2% in the United States over a period of 2-3 years, according to a new ADB working paper The Impact of Trade Conflict on Developing Asia. The study looks at three scenarios: current; a bilateral escalation; and the worst case. The larger impact on the PRC is because tariffs imposed by Washington on Beijing are an order of magnitude larger than PRC’s retaliatory measures. In addition, the PRC is more dependent on US demand for its goods than the other way round.

What started as a bilateral trade clash rapidly became global: these two giant economies generate two-fifths of world GDP and around a quarter of international trade. The report warns that other advanced economies such as the EU and Japan will suffer if the conflict escalates. Evidence of collateral damage to other Asian economies is emerging, even as exports from the region remain strong. Investors and stock markets are increasingly concerned and the IMF has said the conflict will make the world poorer.

The study not only examines the direct impact of the conflict on all tariff-affected goods, but also estimates the indirect effect of tariffs on GDP, exports and employment. Data show the impact globally, regionally and on individual countries. The negative impact of the trade war on the PRC cuts across many sectors. In the worst case scenario the PRC electronics industry would be hardest hit by 0.15% of GDP. Other affected sectors in the PRC include wholesale trade, mining, agriculture, textiles, financial services and chemicals.

One positive outcome from the clash is that trade redirection could benefit some Southeast Asian industries that compete directly with the PRC, such as electronics and textiles. The ASEAN-5 countries are set to gain in both these sectors.

The effect on global employment under the current scenario is negative, given weaker global GDP and lower trade. The initial wave of trade measures could result in a loss of 3.5 million jobs in the PRC and around 180,000 in the US. Escalation could result in job losses of 8.5 million in the PRC and significant job losses in developed economies such as the EU and Japan. Trade redirection means there could be slight employment gains in developing Asia outside the PRC.

The US-PRC trade conflict is focusing Asian policy makers on developing ways of cushioning their economies from its effects. The report gives the example of expansionary fiscal policies and the lowering of the reserve requirement by the central bank the PRC to boost credit to counteract some of the negative impacts outlined above.