SINGAPORE - Media OutReach - 2July 2019 - The escalation in global trade tensions over the last year hasbecome a focal point of the world economic outlook. The growing trade disputebetween China and the US takes centre stage, with $360bn of bilateral goodstrade between the two economies being subject to increased tariffs.

Therisk of a further escalation in global trade tensions is elevated, especially after thebreakdown of US-China negotiations in May 2019, and the subsequent hike inbilateral tariffs shortly after. Divergent strategic aims on industrial policyand technology between the US and China create significant risk the tradedispute evolves into a full-blown trade war. US trade tensions with othereconomies have also risen, albeit to lesser degree. Nevertheless, the risk thatthese tensions result in a multilateral trade conflict cannot not be ignored.

Ina trade war scenario, the world economy would slow sharply, growing at theslowest rate since the global financial crisis. We explore a scenario where the USimplements a range of additional tariffs on China, and its other partners. Inthe short-term, the impact on financial markets and global demand is severe,with world growth falling 0.1ppt and 0.9ppt below the baseline (of no furthertariff hikes) in 2019 and 2020 respectively. The subsequent recovery remainssluggish even in the later stages of the scenario as productivity growth isreduced in the economies heavily impacted by increased in tariffs.

The trade war spreads across Asiathrough trade and financial channels. Our simulation tracks the transmissionof the shock from a US-China, US-Europe and US-Global (auto sector) trade war.Firstly, through direct trade channels, and associated second-round effects oninvestment. And secondly, for countries which require capital from overseas tofill current account deficits and support economic growth, the trade warresults in a withdrawal of capital, tightening financial conditions andundermines domestic demand in these economies.

Taiwan is amongst the hardest-hiteconomies in Asia in the trade war scenario. With deep integration to China's supplychain and high levels of domestic value add in its exports, Taiwan's economyfeels an immediate impact from the trade war, losing 1.5% of GDP versus ourbaseline forecast (of no further tariff hikes or cuts) by 2020. The long-runimpacts are almost twice as great. Governmentdebt rises by around 3% of GDP into the long run, and the stock market losesmore than 10% versus the baseline.

Impacts elsewhere in Asia also matter. Taiwan is not the onlyeconomy severely dented by the trade war -- South Korea feels similar (albeitvery slightly lesser) GDP impacts through the 2019-2024 period, and evenless-impacted economies lose 1.5-2pp over this horizon. There are permanentwealth losses through stock market falls, and a loss of around 1.3m jobscompared to the baseline across our sample of six economies.

Reportis commissioned by Flat Globe Capital and written by Oxford Economics.