China and the U.S., the world’s two largest economies, have been quarreling over trade for months, engaging in a tit-for-tat tariff battle and intermittently frightening investors with the prospect of a full-blown trade war. But the macroeconomic fallout from a worsening of trade relations might not be as severe as feared, according to Capital Economics.

In the most recent tit-for-tat developments between Beijing and Washington, President Donald Trump could proceed with import tariffs on some $200 billion more Chinese goods that could be announced as early as this week. China has meanwhile said it wouldn’t negotiate under threat, according to The Wall Street Journal. Last week, reports said China would seek permission from the World Trade Organization to impose sanctions on the U.S. as part of a separate dispute.

And while investors are worrying about the possible fallout that could hit companies, whole sectors, such as electronics or agriculture, and other countries caught in the crossfire, the macroeconomic implications for the U.S. and China appear limited, according to chief global economist Andrew Kenningham.

He offers five reasons why.

First, as long as “fiscal policy is not tightened, tariffs do not necessarily reduce aggregate demand,” wrote Kenningham, adding that it might redirect trade flows to other countries in response to the tariffs rather than eliminate the demand.

Second, global trade volumes would likely not just drop off either.

“The elasticity of demand for most Chinese exports is quite low, and many U.S. exports to China could be redirected,” Kenningham said. On top of that, a sizable chunk of U.S. sanctions on Chinese imports have been offset, at least in part, by a weaker Chinese yuan USDCNY, +0.15% USDCNH, +0.02% against the U.S. dollar DXY, +0.04% . Indeed the dollar-yuan pair is up around 5.5% in 2018 so far, and almost 5% over the past 12 months, according to FactSet.

Read:Case for dollar bulls intact ahead of central bank meetings

Third, exports don’t account for that much of gross domestic product for either country.

Although both the U.S. and China rely on trade, they are “fairly closed economies,” as Kenningham calls it. Exports accounted for roughly 20% of China’s GDP last year, down from 36% in 2006, he cites.

For the U.S., this share is even lower, as shown in the chart below, with exports only accounting for 12% of GDP.

Capital Economics

Fourth, bilateral trade between the two countries contributes an even smaller amount to GDP. For China, U.S. trade contributes some 2.5% to GDP, while it is only 1% for the U.S. in reverse.

“If this trade fell by 20% — which is more than we expect — the direct hit to their GDP would be 0.5% or 0.2%, respectively,” Kenningham argued. Hardly a reason for panic.

Fifth, neither U.S. nor Chinese inflation should be impacted much by all of the above. And as consumer prices are a key metric for central bankers, it means that monetary policy would also be less likely to be impacted by a trade war.

“It may seem counterintuitive that a trade conflict between the world’s two largest trading economies would have only a small impact on the global economy,” Kenningham said. “But while China and the U.S. account for a combined 22% of world exports, bilateral trade between them accounts for just 3.2%,” he said, adding that protectionism would have to spread far beyond just U.S.-China trade to impact global GDP growth.

Capital Economics

That might explain why at least U.S. investors, despite the occasional knee-jerk reaction to trade-related headlines or presidential tweets, have largely kept trade fears on the back burner. The S&P SPX, -2.37% moved back into record territory in August and is up more than 8.7% in the year to date, while the Dow industrials DJIA, -1.92% are up 5.8%.

Chinese stocks, however, have suffered, along with other emerging markets and global stocks outside the U.S. in general. Hong Kong’s Hang Seng Index HSI, -1.96% , of which 50 components are mainland Chinese companies, fell into a bear market last week Tuesday, ending more than 20% down from its Jan. 26 high and meeting the common definition of a bear market.

Read:The new fear for stock investors is an emerging-market meltdown

The Shanghai Composite SHCOMP, -1.65% fell into bear territory in June, while the MSCI emerging-markets index, tracked by the iShares MSCI Emerging Markets ETF EEM, -1.55% dropped into bear territory two week ago.

See:Here’s how dramatically U.S. stocks are dominating emerging markets this year