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All-Out Trade War Could Cost Global Economy $1.2 Trillion

All-Out Trade War Could Cost Global Economy $1.2 Trillion
(Florin Seitan/Dreamstime)

Monday, 05 August 2019 01:47 PM

The recent escalation in the trade war could cost the already fragile world economy dearly. Modelling by Bloomberg Economics shows that global GDP would be 0.6% lower in 2021 if the market slumps during an all-out trade war, compared to a no trade war scenario.

That’s the equivalent of a $1.2 trillion hit to the global economy.

Meanwhile, Donald Trump’s trade battle with China is starting to look like a forever war -- a quagmire with no end in sight, no clear path to a resolution and more potential land mines for an already weakening global economy.

With his move last week to announce his biggest tariff hike yet on imports from China, the president made clear he was exasperated with counterpart Xi Jinping and a perceived lack of Chinese urgency. While Trump portrayed the threat as a move to pressure Beijing to cut a deal, China responded with a painful measure of its own -- letting its currency tumble to the lowest in more than a decade.

By doubling down on a negotiating tactic that has yet to deliver any meaningful results and is damaging the U.S. and Chinese economies, Trump appears to have made any deal less, rather than more, likely. Moreover, it increasingly looks like he and his team may not have any other ideas on where to go next or how to bring an end to the fight.

“We did not enter this particular trade war with China with a clear plan for how to get out,’’ said Philip Levy, a member of President George W. Bush’s Council of Economic Advisers who is now chief economist for freight forwarder Flexport. “The plan for how to get out seems to have been ‘We’ll threaten them, they’ll succumb and then we’ll be happy.’ So far we haven’t seen anyone talk about what if they don’t succumb?’’

Rather than bend, Chinese officials responded Monday by letting the yuan depreciate and cutting off purchases of American soybeans. They’re pledging to retaliate further if Trump goes ahead with his threat to impose tariffs starting Sept. 1 on Chinese imports. Those include consumer goods like smartphones, kids’ clothes and toys, and together are worth some $300 billion in annual trade, or more than the entire $250 billion already hit with import taxes by Trump.

Investors are starting to grasp the potential for a protracted conflict. U.S. equities last week had their worst week of the year and were tumbling again Monday along with emerging-market currencies. Treasuries rallied with the yen and gold as traders bid up haven assets.

Morgan Stanley economists said in a research note Monday that if the higher U.S. tariffs and China’s retaliation last for four to six months, the global economy will be in a recession in nine months.

The Chinese have sent plenty of signals that they are confident they can weather Trump’s assault. Since May, Xi has called for a new “Long March.” Among the issues mulled at a politburo meeting on the economy before last week’s tariff threat, analysts say, was how to navigate a U.S. escalation.

© Copyright 2019 Bloomberg News. All rights reserved.

   
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The recent escalation in the trade war could cost the already fragile world economy dearly. Modelling by Bloomberg Economics shows that global GDP would be 0.6% lower in 2021 if the market slumps during an all-out trade war, compared to a no trade war scenario.
trade, war, china, global, economy
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2019-47-05
Monday, 05 August 2019 01:47 PM
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