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Impact of a Global Trade War on the Economy

Global economic growth is peaking and vulnerable to a trade war

A trade war, initiated by the United States, would do serious damage to the global economy as protectionist actions escalate. Countries imposing tariffs and countries subject to tariffs would experience losses in economic welfare, while countries on the sidelines would experience collateral damage. If tariffs remain in place, losses in economic output would be permanent, as distorted price signals would prevent the specialization that maximizes global productivity.

The probability of an all-out trade war, while still relatively low, is increasing. China and the United States have the most at stake, and it is in their best interests to reach an agreement that addresses key issues such as market access, intellectual property rights, and joint-venture technology transfer.

Monetary policy and financial market responses will influence the outcome of a trade war. The US federal funds rate rises more quickly than in the baseline forecast in response to higher domestic inflation. A rise in financial stress would adversely affect new credit flows and restrain investment, industrial production, and trade. In addition, global equity prices are expected to decline in a protectionist environment.

Macroeconomic impacts: No winners in this trade war

There are no real winners in this US-initiated trade war. Countries facing new tariffs, including the United States, experience declines in real exports and GDP. Other countries are hit indirectly through weaker demand for their own exports, either through supply chains or in response to weaker global economic growth. These effects outweigh any potential gains from trade diversion to avoid tariffs. In the protectionism scenario, the level of global real GDP is reduced 0.1% this year, 0.8% in 2019, and 1.4% in 2020. Thus, global economic growth in 2019 and 2020 is only marginally above our 2.0% threshold for a world recession.

World trade suffers in a more protectionist environment, as countries turn inward and multinational companies move production to end markets to stay competitive. In the scenario, real global exports of goods and services are 2.4% below the baseline level by 2020. The sharpest declines in real exports occur in China and the three North American countries.

Not surprisingly, the United States experiences the largest decline in real imports of goods and services. Compared with the baseline level, real US imports fall 4.5% in 2020. Due to the high import content of its exports, China also experiences a significant drop in real imports, which fall 3.2% below the baseline in 2020.

Real fixed investment is restrained in the trade war scenario, reflecting losses in real exports, financial stress, declining equity prices, and reduced foreign investment in emerging markets targeted by US import tariffs. The most substantial losses are in China, as both foreign and domestic investors will take a more cautious approach to capital spending in China.

Bottom line consequences

The timing of the trade war (never good) could not be worse. It is occurring as monetary stimulus is beginning to wear off, oil prices are elevated, and political risks are on the rise. Global growth is beginning to slow—the only question is, how much?

Learn more about the trade implications to steel and aluminum markets and section 232.

In this report, we utilize the IHS Markit Global Link Model (GLM) to assess the potential macroeconomic impacts of a trade war initiated by the United States. The GLM is a quarterly econometric model describing the economic and financial activity and interactions of 68 countries. Starting with our baseline forecast, we develop an alternative scenario in which the United States levies wide-ranging tariffs on imports from countries with which it runs a merchandise trade deficit exceeding USD4 billion. Since the European Union is a customs union with common external tariffs, we assume equal tariffs are imposed on US imports from all 28 member countries. We also assume the targeted countries retaliate by imposing commensurate tariffs on their imports of goods from the United States.

Experts

Nariman Behravesh, Ph.D.

Dr. Behravesh works closely with the company's chief economists on the forecasting process at IHS Markit. Dr. Behravesh and his team have received numerous awards, among them the 2017 Lawrence R. Klein Blue Chip Forecast Accuracy Award and top forecasters by Consensus Economics in 2013. Attaining consistently high annual ranking among US forecasters from The Wall Street Journal, Dr. Behravesh was ranked #3 (out of 56) for 2006, and was the only forecaster to place in the top six for 2003, 2004 and 2006. He frequently is cited by leading business publications, including The Wall Street Journal, The New York Times, The Financial Times, Forbes and US News & World Report. He appears regularly on national radio and television programs, including BBC World Business Report, NBC Nightly News, CNN Headline News, The News Hour with Jim Lehrer (PBS), Fox News, CNBC, Bloomberg TV and Radio, All Things Considered and Marketplace on National Public Radio. He is a featured speaker at many of the top global conferences each year, including IHS Markit CERAWeek and the World Economic Forum in Davos, Switzerland.Dr. Behravesh holds Ph.D. and M.A. degrees in economics from the University of Pennsylvania, where Nobel Laureate Lawrence R. Klein was his dissertation advisor, and a Bachelor of Science from the Massachusetts Institute of Technology, US.

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Sara Johnson

In this role, she helps clients assess worldwide business and financial opportunities and risks. Ms. Johnson co-authors the Global Executive Summary, manages the Executive Strategy Council, and presents the economic outlook to international conferences. She previously served as North American research director and chief regional economist with Standard & Poor's DRI, and managing director of global macroeconomics with Global Insight, predecessors of IHS Markit Economics & Country Risk that is now part of IHS Markit. Ms. Johnson is a former director of the National Association for Business Economics and the NABE Foundation and was named an NABE Fellow in 2014. She is past president of The Boston Economic Club and a member of the American Economic Association. Ms. Johnson holds a Bachelor of Arts in Economics and Mathematics from Wellesley College, US, and earned her Master of Arts in Economics from Harvard University, US, with concentrations in Finance and Macroeconomic Theory.

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John Anton

Mr. Anton has expertise in the ferrous metals industry, he is responsible for evaluating the outlook for steel. He also specializes in forecasting commodities and works closely with the Automotive, Construction, Energy and Economics teams at IHS Markit. Steel demand is linked to outlooks from these key sectors. In turn, the profitability of these sectors can rise or fall depending on the price and availability of steel.Prior to joining IHS Markit, now IHS Markit, in 1995, he was in the private practice of law as well as an economist and statistician for the United States Department of Labor in the Bureau of Labor Statistics (BLS). Mr. John Anton received a Bachelor of Science in Economics from Florida State University, US, and a Juris Doctor from the Marshall-Wythe School of Law at the College of William and Mary, US.

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