Tariff endgame will likely see US, EU teaming up to isolate China: Macquarie

Investing.com -- The Trump administration has rolled out tariffs against foe and friend alike, but Macquarie believes the end game for tariffs would likely see the US, Europe and allies teaming up to isolate China in a new cold war.   

"In our view, isolating China rather than self-isolating the US has probably been the Trump administration's strategy all along," Macquarie analysts wrote in a recent note.

The analysts identified various cold war scenarios, including an all-out global trade war where all countries raise trade barriers; Europe, Asia, and others teaming up against the U.S.; or the U.S., Europe, and Asian allies joining forces to isolate China.

The U.S., Europe, and Asian allies joining forces against China in a cold war scenario is the "likelier outcome, but it will take time to play out, especially in view of the myriad of bilateral discussions needed to get us there," the analysts said.

The Trump administration's approach of imposing tariffs on allies as well as rivals is seen as a strategic move to eventually align Western and Asian allies against China.

While China has sought to strengthen its ties with key economic blocs including Europe, Canada, and Mexico, these countries "still rely heavily on trade with the US," Macquarie said.

"That means that these countries can't or wouldn't align themselves with China over the US easily, if a choice would need to be made," the analysts said.

It remains to be seen whether "the 'carrot' of diplomacy and the 'stick' of tariffs gets the US to its preferred cold war scenario," they added.

Still, the possibility of China outmaneuvering the US and inducing the world to isolate the US instead can't be ruled out. Yet, this is unlikely as "most Americans would be highly averse to losing the alliance with Europe or allowing China to displace the US," Macquarie said.