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Downside Risks for US Trade

Before the coronavirus pandemic, one of the major market volatility driving forces was the U.S. and China trade war. Since President Trump’s election in 2016, the United States changed its foreign policy drastically, Warning of new tariffs on goods from China, Europe, and even some closer partners like Canada and Mexico. 

In some cases, tariffs were imposed. In some other instances, they were the basis for ongoing negotiations, especially with China.

The markets rose and fell with the way the negotiations went, and every headline was responsible for a move in the benchmark S&P500.

Then the pandemic started.

Grimm Picture for the American Trade

America is the largest economic power in the world and the way it conducts its trade matters for all countries. A study conducted by Oxford Economics shows that U.S. trade faces downside risks even after the crash created by the pandemic in the last four months.

The study shows that exports and imports represent a relatively small proportion of the U.S. GDP, but the elasticity to output grew significantly in the last decades.

The drop in trade volumes for the first half of the year is expected to reach 23% – twice the fall in the GDP. What is more important, is there’s limited upside potential moving forward in the second half of the year.

Global recession deepens every month, with a major impact on US trade too. A recent paper from the IMF shows an expected global contraction of 4.9% for 2020, down from 3% in April – the lowest on record.

The road ahead is likely to be a bumpy one, instead of showing a sharp recovery. Speaking of recovery, Oxford Economics monitors a so-called recovery-tracker, looking at production, employment, health, demand, etc. in the US economy and how they evolve during the crisis. So far, the recovery tracker showed improvements for the last ten weeks up to the week ending June 12, when a relapse appeared due to new spikes in the COVID-19 cases in many US states.

We do not know how the trade war with China and, likely, with the European Union (EU) will play out, as there’s an election coming in the United States a few months from now. Should Trump secure a second term, the US-EU trade war is likely to enter a new phase as Berlin is preparing to strike back against the US if Trump follows-through on its threat to kill off Nord Stream 2 gas pipeline.

Instead of the US-China trade war, there is a real chance for a transatlantic trade war to happen. If that is the case, the next four years will mark an ongoing battle in the international trade arena.

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