Realizing recent tariff threats would pose a significant threat to world growth, potentially cutting global gross domestic product (GDP) by up to 0.4 percentage points in 2019, Oxford Economics said in a note this week.
“The trade conflict is now in danger of a serious escalation,” it said. “The global spill overs from an escalation of current trade disputes, especially the U.S.-China battle, would be considerable.”
It estimated that tariffs currently have been imposed on around US$60 billion, or around 0.3 percent, of world trade so far, but the existing threats of additional tariffs were more than ten times higher.
That could see tariffs rise to goods valued at over US$800 billion, or 4 percent of global imports, if recent threats were carried out, with an added risk from potential further retaliation, it said.
In a model of an escalation scenario where the U.S. puts tariffs on US$250 billion of Chinese goods, China retaliates, and the U.S. and EU also place high tariffs on each other’s auto exports, starting in the third quarter, global GDP would be cut by 0.2 percentage points in 2019-20, with double that impact in the U.S. and China, Oxford said.
“Second-order effects on business confidence, financial markets and investment could magnify this effect. If we also assume that this tariff escalation process leads to a global equity price slump of 10 percent, the negative impact on world growth doubles to around 0.4 percentage points by 2019-2020,” it said.
That dent to global trade comes amid other signs of a slowdown, Oxford noted.
“Rising protectionism comes at an inopportune time for the world economy, with some trade indicators suggesting the upturn of the last year has petered out and broader growth indicators also pointing to a loss of momentum,” it said.
Freight-based indicators were “especially worrying,” with six-month annualized growth falling from 6-7 percent in January to around zero in April, it said.
In the U.S., Oxford Economics estimated U.S. growth was near its peak and any buffer the robust economy might provide against protectionism’s hit was set to wane through 2019, it said. Rising oil prices and interest rates were also set to weigh on the global economy, it said.