Rising protectionism impact on financial markets has been contained, European Central Bank researchers said in a paper published Tuesday, while warning of graver risks if a trade war goes global. "The total market impact of tariff-related news appears to have remained relatively contained so far and balanced across areas" in stock and bond markets, the economists said -- although firms and sectors directly affected have suffered much worse.
But "an escalation to a more generalised trade war" - in which all countries imposed border taxes on one another's imports - could cause "strong financial market corrections", they warned. The Frankfurt institution's analysis comes at the end of a year of escalating protectionist threats and measures by US President Donald Trump, especially against the world's second economy China.
During 2018 Trump's tariffs have risen stepwise to $300 billion, with more than $250 billion targeted at Chinese imports, along with a tariff on steel and aluminium that also covers other countries' products. "Cumulative changes in US and euro area equity prices in response to tariff-related announcements have been roughly comparable so far, amounting to around minus 7.0 percent," the ECB researchers found.
Meanwhile the "risk premium" element of interest non-financial firms on both sides of the Atlantic pay on their bonds has swelled over the year. Other factors like political risk in the eurozone and strong growth in America were difficult to differentiate from the impact of tough talk on trade.
Nevertheless, "the symmetric reaction between the United States and the euro area suggests that markets view increases in tariffs as lose-lose situation for all involved," the economists judged.
Pointing to the much worse performance of companies and sectors directly targeted by tariffs, they predicted that "should the threat of an increase in tariffs be extended to cover products across all sectors of the economy, a larger overall market impact can be expected."
After simulating three trade war scenarios - two of the US versus the rest of the world, and one where every country imposed tariffs - they found that "a regionally limited trade war would not give rise to major financial stability risks."
Only more countries being dragged in or a massive escalation in the level of the tariffs and the range of goods affected could lead to sharply higher interest rates on bonds and falls in the stock market.
Trump remained unperturbed this week by warnings of the dangers of protectionism, saying Monday he will extend tariffs on Chinese goods yet further next year if he and Chinese President Xi Jinping do not seal a "deal" this weekend at a G20 meeting.