The Singapore-headquartered bank expects trade rows will be resolved through talks but considers the scale of any damage if there is a full-on trade war.

A full-scale trade war between China and the US will cut gross domestic product growth in those countries by as much as 0.6 per cent this year, according to economists at Singapore's DBS.

Based on evidence from previous rises in protectionism, the bank said that in the "worst-case scenario of a trade war", equities could fall by 15 to 20 per cent.

The bank is one of a number of financial institutions trying to get a handle on the economic fall-out from worsening trade relations between the US and China. US President Donald Trump has slapped tariffs on imports from China, and threatened further measures against entities such as the European Union. JP Morgan, to name one bank, has warned that a trade war will disrupt global supply chains.

Trump has asked the US Trade Representative office to identify $200 billion worth of Chinese goods to be hit with an additional 10 per cent tariff; should China retaliate, another $200 billion worth of goods will be targeted. Secondly, the US has also taken steps to restrict China’s access to US technology, as America seeks to protect its strategic advantage in that space.

"Prepare for the worst; pray for the best. While our base-case scenario remains – this saga will eventually be resolved through negotiations, albeit heated ones – it is prudent for us to assess the worst-case scenario of a global trade war, in terms of its impact on the global economy and on financial markets," DBS said in a study issued earlier this week.

The bank considered two previous US protectionist measures: the Smoot-Hawley Tariff Act of the early 1930s, and the US steel tariffs of the George W Bush administration in 2002.

The 1930s act hiked tariffs on more than 20,000 imported goods, provoking retaliation from foreign countries, leading to a general decline in cross-border trade. As DBS noted, it is often stated that the act worsened the economic situation, arguably transforming a severe recession into a general depression. The legislation coincided with a 79 per cent plunge in the S&P 500 Index from 17 June 1930 to the trough of mid-1932. The 2002 steel tariffs coincided with a 32 per cent slide in the S&P 500 Index. DBS argues that the 2002 episode is a more meaningful comparison, given that the background circumstances of the 1930s were different.

Separately, Denmark-headquartered banking group Saxo weighed in on the protectionism issue. 

“There are no winners in a trade war, and the trend is pointing in the wrong direction as nationalist agendas erode the status of global institutional frameworks. History teaches us that this can end badly. If the loser is a big economy or a strong political power, they may impose restrictions – tariffs, for example – to counter the competitive disadvantage,” Steen Jakobsen, chief economist and chief investment, Saxo Bank, said in a note.

“What makes trade issues more challenging today is that currencies no longer follow the paths that current account dynamics imply they should. A country running a current account surplus is supposed to see a strong/higher currency, but in today’s world, the big current account surplus economies all seek to avoid currency strength versus the global dollar standard to maintain competitiveness and avoid the risk of deflation," he continued.

“It’s not just about Trump, either – it also has a lot to do with China’s move to raise its global profile along every axis. China’s chief approach to this vision is so far a mercantile one via its commitment to the One Belt, One Road plan. Beijing may have already given up on the US as a long-term export market – the longer it keeps its market share, the better. The US, of course, is now actively breaking down the very international organisations that have supported growth and globalisation since the end of World War II and after the fall of the Berlin Wall," he added.