Trade War Impact Could Be Exacerbated by a Market Slump

(Bloomberg) -- Should a trade war be accompanied by a market slump, the impact on the U.S. could be worse than on China as the latter is relatively insulated from world equity shocks, according to Bloomberg Economics, which mapped out four scenarios on how the economy could be affected. In its final scenario, the U.S. imposes 10 percent tariffs on all imports, the rest of the world retaliates and financial markets slump. In that stylized example, layering on a tightening of financial conditions raises the peak GDP growth impact to 0.8 percentage points in the U.S. and 0.4 percentage points for the world. China suffers from tariffs but escapes the additional burden of tighter global financial conditions, reflecting its still relatively closed capital markets. Of course, based on the current evidence -- it might face its own domestic market shock.

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