Tariffs in the spotlight: a tool for analysing trade conflicts

Scenario 1: Moderate losses of prosperity

The US imposes tariffs of 10 per cent on all imports and 30 per cent on China:
In this scenario the loss of prosperity for Switzerland would be moderate. Its loss of income in real terms would be 0.1 to 0.2 per cent per year. This loss of income can be seen more or less as a decline in gross domestic product (GDP). “That would hurt but would not be catastrophic,” explains Hans Gersbach. The pharmaceutical industry in Switzerland would be especially directly affected, although manufacturers of machinery, equipment, precision instruments, watches and foodstuffs, for example, would also be hit by these tariffs. In this scenario, however, we would still be a long way from an economic crisis. Nonetheless, this scenario also poses the risk of the above-mentioned second-layer effects (amplification effects), which increase with the duration and persistence of protectionist measures but remain fairly moderate in such a scenario. In a fragile global economy, however, even these effects can intensify further.

Scenario 2: New export opportunities

A serious trade conflict between China and the US involving very high reciprocal tariffs and export restrictions:
In this scenario the effect on Switzerland would be neutral in the short term. There would even be new export opportunities for Switzerland in sectors such as precision instruments. In the long run, however, Switzerland would also be hit hard by this conflict if supply chains were disrupted or American and Chinese demand for exports from Switzerland fell sharply because the downturn in these countries, especially the US, was so severe. In short, the second-layer effects would become increasingly significant the longer the conflict were to last. In this scenario the United States and China would primarily be hurting themselves, although America would suffer even more than China because the US is more heavily reliant on Chinese raw materials as well as on intermediate products and end-products from there. China’s share of US imports is well over 10 per cent on average in the case of intermediate products and is significantly higher for electronics. In addition, many Chinese intermediate products find their way to the US via other countries. In the short term, significant tariffs and other trade barriers cause economic harm, which typically intensifies when many countries are affected. The longer these tariffs last, the greater the impact of structural changes.

Scenario 3: A horror scenario looms

Decoupling between major economic blocs:
If two large economic blocs were to form around the US and China, which were hardly trading with each other, this would lead to an economic crisis if it were to happen quickly. Experts refer to this case as ‘decoupling’ or ‘Cold War 2.0’. “That would be a horror scenario,” says Gersbach. In this situation, Switzerland would face GDP losses in the order of 4 to 5 per cent per year, depending on the speed of such decoupling. This scenario could potentially give rise to an economic power sphere led by the United States and joined by the European Union, Norway, Switzerland and the non-EU G7 countries (Canada, Japan and the United Kingdom). These countries then impose significant trade barriers on exports from a second economic power sphere, namely China (including Taiwan and friendly states), which reacts in the same way. Countries outside these two spheres continue to trade without suffering any direct disruption but are affected indirectly. It is important to note that not all sectors lose out in the same way. For example, precision instruments and chemical products from Switzerland would be in greater demand in such a scenario. The extent of the absolute losses depends on how quickly decoupling happens.