The growing prospect of a trade war is looming large on the global crude demand scenario.

With the Trump administration opting to slap tariffs on Chinese products, China is on the firing line. Initially, the US imposed tariffs on Chinese products worth $34 billion. Reports are now emerging that another $16bn worth of tariffs on Chinese exports to the US is in the offing. Meanwhile President Donald Trump has ordered the administration to levy tariffs on at least an additional $200bn worth of Chinese products.

China is not sitting back. In retaliation, it has taken measures, placing additional taxes on import of agricultural products, automobiles, medical products, coal and also petroleum from the US Chinese are also planning to levy a tariff on import of petrochemicals from the US.

Others are also being sucked up in the quagmire, resulting in a free for all scenario.

Last week, Bloomberg reported that Russia was imposing higher tariffs on US products in retaliation for US duties on metals imports.

Interestingly, last month while Trump stepped up trade penalties on China, he also moved swiftly to impose tariffs on Canada, Mexico and the European Union – its closest political and trade allies for decades. The US proposed a 25pc levy on steel and 10pc on aluminum imports from these countries too.

And as negotiations between the US and its Nafta allies – Canada and Mexico – besides the EU failed to find a solution to the American demands, these countries announced retaliatory action.

“The American administration has made a decision today that we deplore, and obviously is going to lead to retaliatory measures, as it must,” Canadian Prime Minister Justin Trudeau said in a statement, denouncing the decision by the Trump administration while announcing retaliatory tariffs on US steel, aluminum, as well as an array of other products.

This meant, in all practical sense, the era of free trade is almost over.

This all is having an impact on the global economy. Obviously, the US and China’s economies are most at risk, but indeed they are not the only ones. An all-out trade war could shave 0.25pc off the GDP of both economies this year. It gets much worse the next year – with both countries seeing a reduction in the growth of about 0.5pc or more, DBS’s chief economist Taimur Baig was quoted as saying in the press. “Considering China grows at 6-7pc and the US at 2-3pc, we believe the damage would be greater to the US than on China”. But countries like South Korea, Singapore and Taiwan could all be affected too because of disruption to supply chains, he added.

The escalating trade war could lead to significant fallout for the oil markets too. The tariffs risked the potential growth of oil demand, the IEA underlined in one of its recent reports. “A slowdown (in global trade) would have strong consequences, particularly for fuel used in the maritime sector and in the trucking industry,” IEA emphasised.

The IEA estimated that a reduction of 1pc in world gross domestic product growth would reduce oil demand growth by around 690,000 barrels a day. “Oil demand would suffer the direct impact of lower bunker consumption and lower inland transportation of traded goods, reducing fuel oil and diesel use,” the report noted.

Though it’s too early to forecast the potential im­­pact of rising tariffs, the US-China trade dispute “is introducing downward risk” to forecasts of global oil demand growth of 1.5 million barrels a day in 2018, the IEA reported. The Inter­national Monetary Fund is also of the opinion that any significant slowdown in trade would hit fuel usage.

The demand destruction scenario is re-emerging at a point in time when the Organisation of Petroleum Exporting Countries (Opec) has begun pumping more and more, as the Trump administration is after them to enhance output.

Opec is visibly worried about the possible consequences. “If trade tensions rise further, and given other uncertainties, it could weigh on business and consumer sentiment” it warned in a report. “This may then start to negatively impact investment, capital flows and consumer spending, with a subsequent negative effect on the global oil market.”

Once disruptive forces are unleashed, no one remains in command. President Trump and his administration need to understand that it is virtually impossible to put the genie back in the bottle. And crude markets are no exception to this rule of thumb.

Published in Dawn, July 15th, 2018