The most likely outcome to escalating US-China trade tensions is a negotiated solution that has limited effect on the near-term growth outlook in either country. However, the risk of a more material impact is growing, according to Fitch.

Last week China proposed levying retaliatory tariffs against $50 billion in US products. US President Donald Trump stated that he was considering additional tariffs on a further $100 billion in Chinese goods to the $50 billion he had initially proposed on 22 March.

“The potential for trade protectionism to negatively affect the US and China's growth outlook is rising with every incremental escalation in tariff rhetoric, which could lead to a full-blown trade war,” the credit rating agency says in a note seen by Kallanish. “We maintain that this would be an extreme scenario, but the implications of such a wide-ranging tariff war would be significant.”

The US and China would each see Gdp reduced by over 2 percentage points from the base line after two years, with China being more affected. Other major economies including the Eurozone, Japan and the UK would see lesser negative effects but still see growth deceleration, according to Fitch.

“Market reaction to rising uncertainty could pose macroeconomic risks even before the tariffs' actual implementation,” the agency observes. “A significant Chinese yuan depreciation, for example, would likely cause a shock to global markets and potentially affect investment and global trade flows.”

For now, the $50 billion tariff proposals are small relative to the overall size of the US and Chinese economies and would have limited effect on trade. Fitch continues to forecast 2.7% Gdp growth for the US in 2018, although individual sectors could be more affected by the implementation of tariffs.

“The tariff proposals may well be part of diplomatic positioning for negotiations and may never come into effect should a mutually agreeable deal be reached that addresses US concerns over the bilateral economic relationship,” Fitch concludes.