A full-blown trade war could cost the global economy $470 billion, according to Bloomberg Economics.
The US decision to slap tariffs on steel and aluminum may just be the beginning, with President Donald Trump warning of more levies and other economies promising to respond.
Cecilia Malmstrom, the European Union’s trade chief, vowed on Monday to “stand up to bullies.”
In a scenario where the US implements a 10 per cent levy on imports and the rest of the world retaliates, analysis by Bloomberg Economics published Monday says the global economy would be 0.5 per cent smaller by 2020 than it would have been without tariffs.
According to economists Jamie Murray and Tom Orlik, that’s an extreme scenario, “but it’s no longer an impossible one.”
They see the move rippling through the world economy in a number of ways, starting with faster inflation that dents US consumer demand, which in turn hurts other economies’ exports.
Retaliation would see the inflation shock replicated in other nations, with goods substitution hitting US exports.
The impact on the US would see the economy 0.9 per cent smaller in 2020 relative to the forecast based on no tariffs. Inflation would accelerate, though BE assumes the Federal Reserve looks through the move as temporary.
In fact, most global central banks could face a “tough choice” between tackling faster price growth and weaker demand in a trade war.
Based on their model, BE estimates that global trade could be 3.7 per cent lower by 2020 compared with the baseline scenario.
The impact on the global economy would be felt as soon as this year, albeit modestly, and growth would be 0.2 percentage point weaker in 2019 and 0.3 point lower in 2020.
Mr Murray and Mr Johnson also note that there will be a long-run hit to global GDP, with less trade meaning less competition and more barriers to the exchange of technology and ideas - all reducing productivity and the world economy’s sustainable growth pace.
That’s a concern flagged by many, including German Chancellor Angela Merkel, who has warned that “nobody will win” a global trade conflict.
Germany is one of the nations in Trump’s sights given the size of its surplus, while the president has also said EU treats the US “very badly on trade.” -Bloomberg
