Summary
Bloomberg Economics predicted that a fully-developed trade war would cost the global economy more than $470 billion. This is increasingly concerning as the Trump administration has imposed tariffs on steel and aluminum. President Trump also threatened to take similar measures against other imports. These dramatic actions were received with strong criticism and promises of retaliation from countries worldwide. Among prominent critics is Cecilia Malmstrom, the E.U.’s trade chief, who made the commitment to “stand up to bullies” on Monday.
Based on a model developed by Bloomberg Economics, as a result of a 10 percent tariff imposed on imports by the U.S. government, if the rest of the world decides to retaliate, the international economy would shrink by 0.5 percent by 2020. Renowned economists Jamie Murray and Tom Orlik both believe that this undesirable outcome is looking increasingly plausible, given what has transpired in recent days.
The model also predicted that inflation would rise, but consumer demand could fall drastically. This scenario would likely put central banks around the world to face the tradeoff between tackling inflation and inducing higher market demand. Analysts also believed that the influence of these dramatic changes in trade restrictions could be experienced as early as this year. This would also have an adverse impact on growth as many predicted economic developments to be sluggish in the years ahead.
Political leaders around the world have also expressed serious concerns over these issues, including German Chancellor Angela Merkel, who repeated said, “nobody will win a global trade conflict”.
Trump’s Trade War and the $470 Billion Hit to the Global Economy
A full-blown trade war could cost the global economy $470 billion, according to Bloomberg Economics.
The U.S. 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 U.S. implements a 10 percent levy on imports and the rest of the world retaliates, analysis by Bloomberg Economics published Monday says the global economy would be 0.5 percent 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.”
A Trump trade war may cost $470 billion by 2020 They see the move rippling through the world economy in a number of ways, starting with faster inflation that dents U.S. consumer demand, which in turn hurts other economies’ exports. Retaliation would see the inflation shock replicated in other nations, with goods substitution hitting U.S. exports.
The impact on the U.S. would see the economy 0.9 percent 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 percent 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.
Murray and Orlik 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 U.S. “very badly on trade.”
Source: Bloomberg, Fergal O’Brien, March 12, 2018. Photo credit to Bloomberg .