President Donald Trump’s trade war may soon escalate if the U.S. slaps more tariffs on import goods from China. Mohamed El-Erian, chief economic adviser at the Allianz Group and former CEO of PIMCO, assuaged U.S. investors by noting that the chance of the U.S. getting a better deal from the trade war is 3-in-4.
“I think it’s really important to make a distinction between the journey and the destination,” El-Erian said on Yahoo Finance’s The Final Round on Tuesday. “The journey will involve lots of noise, lots of rhetoric about trade wars, and the technically vulnerable asset classes, such as emerging markets, are going to get hit because of that.”
As for “the destination,” El-Erian predicts a promising outcome for the U.S. The most likely ending of this trade war is a fairer trade system with small tweaks, but no fundamental changes, said El-Erian, assigning a 60% probability to this scenario.
“The U.S. will get its way. We’ll get concessions from other countries, but it won’t fundamentally change the whole trading system,” he said.
However, the U.S. could still win, but the victory may take a longer period of time to achieve and it may be more painful, economically and politically. El-Erian compares this scenario, which he says has a 15% chance of occurring, to “the Reagan moment,” when then-President Ronald Reagan in the 1980s embarked on a military buildup race with the Soviet Union.
“It was a race that the U.S. was destined to win from day one as long as it was willing to tolerate the fiscal cost and the risk of a conflict and it did win it. And it changed completely the geopolitical landscape,” El-Erian said. The Soviet Union collapsed in 1991.
El-Erian sees some resemblances between Reagan’s cold war and Trump’s trade war and believes “the U.S. is willing to incur the risk of a trade war.” Trump has been targeting a rising superpower — China. “Other countries, finally, with longstanding problems in the trade system, change to the better the way the trading system operates,” El-Erian said.
El-Erian isn’t the only economist seeing Trump borrowing a page from Reagan’s playbook. Art Laffer, a former Reagan economic adviser, told Yahoo Finance that Trump used tariffs as a leverage to “get China into the free trade world and to behave like a proper country.” But so far, China has shown no signs of retreat despite the recent meltdown of its stock market. It has been fighting back with tit-for-tat tariffs on the U.S. and vows to continue to do so.
The worst case, according to El-Erian would be a full-blown trade war that sends the global economy into recession, which is especially disastrous to the emerging markets. El-Erian said there’s a 25% chance of this happening. The tariff dispute with the U.S. will probably cost China 700,000 jobs, if Trump’s proposed tariffs materializes and China retaliates, according to a note from JPMorgan Chase on Tuesday. Meanwhile, Mark Zandi, chief economist at Moody’s Analytics, predicts the same measure will cost 354,000 American jobs.
Despite the potential for a global recession, El-Erian is optimistic. “Seventy-five percent probability is this better outcome, which is why the markets very rationally do not overreact to all this walk of talk of trade wars,” he said.
Krystal Hu covers technology and economy for Yahoo Finance. Follow her on Twitter.