Euro zone shares would suffer more than their U.S. counterparts in the event of a full-blown global trade war but emerging markets would likely take an even bigger hit, research published by the European Central Bank suggested on Tuesday.
Trade tensions have risen this year as the United States imposed a plethora of protectionist measures, mostly tariffs on China, raising the risk of an escalation that could exacerbate an already notable slowdown in worldwide trade.
"U.S. equity prices would fall by about 10 percent and U.S. corporate bond spreads would increase by up to 100 basis points in the first year," in an all-out trade war, the ECB said, describing that scenario as 25 percent import tariffs imposed by all countries on each other.
"In the euro area, equity prices would fall by 15 percent and corporate bond spreads would increase by 150 basis point in the first year," the ECB added in a chapter of its Financial Stability Review.
But emerging markets would suffer a more than 20 percent fall in share prices and a more than 400 basis point rise in risk premia, the ECB said.
Up to now, European shares have fallen about as much as their U.S. counterparts after the announcement of protectionist measures, the study said. If the tensions escalated but remained quite limited, those symmetrical price drops would likely continue, it added.
Shares dropped by a cumulative 7 percent on both sides of the Atlantic around key announcements of protectionist measures earlier this year and the drop was 12 percent for companies specifically impacted by the announcements.
"The symmetric reaction between the United States and the euro area suggests that markets view increases in tariffs as a lose-lose situation for all parties involved," the research, said.
"The reason for this likely lies in anticipated retaliation and second-round effects, which are mostly interpreted as a lose-lose situation for the global economy," the study added.