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Markets & Geopolitics

What if: The US-China trade war becomes contagious?

A worldwide outbreak of protectionism will result in real estate investors catching a cold

Simon Rubinsohn, Head Economist, RICS
31 October 2019

In the years since the global financial crisis, globalisation has become something of a dirty word. Widening inequalities within economies have provided the fuel for a new generation of populist politicians who, at the very minimum, have begun to question the “fairness” of many of the existing bilateral trade arrangements and are now making the case for change.

This is clearly evident in the ongoing hostilities between the US and China, which has widened beyond its initial focus into something more akin to a battle for strategic control of future technologies. For the time being, the EU and other countries remain on the sidelines of this bitter dispute, but it is not difficult to see how they could be drawn into a wider trade war if this issue were to escalate. And if they were, it could hasten the collapse of the rules-based international trading system.

That is, of course, taking a huge – and rather pessimistic –leap of imagination. It’s far more likely we will have a period of more frequent trade interruptions as bilateral relationships are frayed. And in this environment there will inevitably still be some winners – businesses who produce substitutes for imported goods that are subsequently placed under restricted entry may, at least for a period, be rubbing their hands. However, I suspect that there will be many more losers, some of whom we are already hearing from as costs begin to rise in response to the imposition of tariffs.

USA bank notes
The ongoing trade war between the world's two largest national economies could have a knock-on effect in the global built environment sector

Let's be clear – very few policymakers openly boast about wanting to restrict trade. It's just that when they look at the detail of existing arrangements, they feel their country is getting an unfair rub of the green. The difficulty is that once this more muscular approach sets in, it often proves hard to row back, and more often escalates into something significantly worse. A rising tide of protectionism has, in the past, tended to be associated with less positive economic outcomes, if not recessions.

Such an environment isn't likely to be good news for the built environment sector either. It's not just that a weaker growth picture will have a direct impact on development opportunities, crimping both demand and viability, but the increasing application of trade barriers is, over time, likely to have an adverse effect on capital flows. Cross-border real estate investment activity last year might have been the third highest on record, but I expect any further fracturing in the trading regime will begin to be reflected in investor behaviour.