U.S.-China mini-deal: trade policy volatility is here to stay
- The so-called “mini-deal” between the U.S. and China is not a game-changer for the global economy. The U.S. average tariff could reach around 8.5% by year-end (taking into account a 10% tariff on EU car imports and the 15 December round of tariffs on Chinese goods). We remain in our intermediate “Trade Feud” scenario; policy volatility is the new norm in trade negotiations, and it goes beyond tariffs (ban lists of companies).
- We are far from a comprehensive agreement. The hardest part of negotiations still lies ahead: the two parties are switching to “Phase two”, which should deal with market access, IP protection, China’s industrial subsidies, U.S. sanctions on Huawei and Chinese surveillance firms. We are unlikely to see a comprehensive deal before the 2020 U.S. election.
- We give 55% probability to the scenario of the U.S. turning its trade policy focus to Europe on 17 November. In the case of a 10% tariff on car imports, aggregate export losses for the EU would be EUR4bn per year, and GDP growth would be hit by an annual -0.1pp.
Brexit: We have a deal: So what?
- A Brexit deal with Europe, but limited time for ratification could require a (short) technical extension. On 17 October, the European Commission and the UK government managed to agree on changes to the Withdrawal Agreement and the Political Declaration ahead of the EU Summit. The Heads of State need to approve it (likely) before it is ratified by the UK Parliament on 19 October (tough but not impossible) and by the EU Parliament next week during the plenary session (likely). The deal lowers the uncertainty (-0.3pp of UK real GDP growth per year since 2018), and should progressively help the UK return to “business as usual”. However, mind the risk of early elections by the end of Q1 2020 and/or a second Brexit referendum.
Turkey: U.S. sanctions hit a vulnerable economy
- After recent Turkish military intervention in North Syria, the U.S. administration retaliated through a tariff of 50% on Turkish steel. The direct impact of this measure should remain quite muted since the U.S. is a minor export destination for the Turkish economy.
- Turkey's economy is not immune to a new shock. Though it has already exited from the deep recession experienced in H218, triggered by a sizeable exchange rate shock (-50% exchange rate depreciation, with a trough experienced in August 2018), GDP growth remains subdued (-0.2% in 2019 and +2.3% in 2020). It should recover to its pre-crisis level only in 2021.