The drop in global trade flows will be similar to that seen during the financial crisis in 2008 if tariff wars continue to escalate, warned the World Bank recently in it latest Global Economic Prospects report.
"A broad-based increase in tariffs worldwide would have major adverse consequences for global trade and activity," the report says. "An escalation of tariffs up to legally-allowed bound rates could translate into a decline in global trade flows amounting to 9%, similar to the drop seen during the global financial crisis in 2008-09."
In the latest round of global trade standoff, the EU, Canada, and Mexico have quickly announced retaliatory trade tariffs on the US as they are not exempted from steel and aluminium levies.
The EU said it would impose import duties on American products such as bourbon, motorcycles and peanut butter. Mexico said it would target pork legs, apples, grapes, cheese and steel products from the US, while Canada will move against US$12.8-billion worth of US imports including aluminum and steel, and everyday products such as dishwasher detergent.
While China and the US continue their negotiations in an attempt to avoid or reduce tariffs, negotiations to overhaul the North American Free Trade Agreement (NAFTA) have not seen progress.
The World Bank said emerging markets and developing markets would be the hardest hit as a result of increased protectionism.
Any setbacks to commercial activities in the world’s largest economies—China or the US—would result in significant negative spillovers for the rest of world through trade, confidence, financial and commodity-market channels.