An analysis by Bloomberg Economics concludes that a full-blown trade war could cost the global economy US$470 billion. It's an extreme scenario, economists Jamie Murray and Tom Orlik concede, "but it's no longer an impossible one."
Claiming national security as rationale, US President Donald Trump has imposed a 25% tariff on steel and 10% on aluminum imports, with some exemptions, and indicated levies on more goods and services. Stoking fears of a trade war, EU Trade Commissioner Cecilia Malmstrom said protectionism was being used "as a weapon to threaten and intimidate us" and vowed to "stand up to bullies."
China, Germany and the European Union have said there would be "no winners" in a trade war, and Bloomberg Economics' analysis quantifies that assertion. Murray and Orlik say America will lose along with the rest of the world, with the US economy 0.9% smaller than what it would have been had there been no Trump tariffs (the assumption is 10% on average).
The tariffs will stoke inflation in the US, first of all, which will dent consumer demand that in turn will have an impact on overall exports into the US by other countries. US exports will also get hit as other markets slap tariffs on American goods like sorghum (as China threatens to do) and bourbon and blue jeans (as the EU is reportedly considering).
The Bloomberg Economics model estimates that global trade would be 3.7% smaller than its baseline forecast. Competitiveness and productivity will suffer as protected industries will no longer be incentivized to innovate, become more efficient and prioritize sustainable growth. There will be also be less sharing of technology and ideas in a protectionist world.
Smaller global economy
Murray and Olik say the impact of US tariffs on the global economy would be felt modestly this year. They estimate the hit to global GDP growth at 0.2 of a percentage point in 2019 and 0.3 of a percentage point in 2020. Assuming the US levies 10% tariffs on imports and retaliation by the rest of the world, the the global economy would shrink by 0.5% in 2020 than the baseline, no-tariff forecast -- which is equivalent to US$470 billion.