In its latest Global Economic Prospects report, published Tuesday, the multinational finance organization had a grim forecast for both emerging and developed markets in the event that trade tensions between the United States and other countries continue to intensify.
“A broad-based increase in tariffs worldwide would have major adverse consequences for global trade and activity,” the report said. “An escalation of tariffs up to legally-allowed bound rates could translate into a decline in global trade flows amounting to 9 percent, similar to the drop seen during the global financial crisis in 2008-09.”
As for global economic prospects, the report suggests they are tilted toward the downside. In particular, the report cites an accelerated tightening of global financing conditions and disorderly exchange rate developments in emerging market and developing economies (EMDEs).
But one of the biggest risks cited is the escalation of trade restrictions among major economies. If it continues, this could derail global trade, with particularly adverse consequences for EMDEs.
A tariff war unfolds
Canada, Mexico, and the EU are unleashing retaliatory trade tariffs on the U.S. in response to President Donald Trump’s announcement last Thursday that those countries would not be exempt from the steel and aluminum tariffs. The exemption expired on June 1 with the White House citing national security grounds as the reason the tariffs were in place.
Mexico announced this week that it would hit the U.S. with a 20 percent tariff on pork imports in response to Trump’s tariffs on steel and aluminum, while Canada is imposing dollar-for-dollar tariff “countermeasures” on up to $16.6 billion worth of U.S. imports in response to the U.S. tariffs.
And on Wednesday, the EU said a raft of retaliatory tariffs, including on whiskey and motorcycles, against painful metals duties imposed by the U.S., would be ready as early as July. From blue jeans to motorbikes and whiskey, the EU’s hit-list of products targeted for tariffs with the US reads like a catalog of emblematic American exports.
China was hit with the steel and aluminum tariffs earlier this year. However, Trump announced last week he was planning on imposing 25 percent tariffs on $50 billion worth of Chinese technology by the end of this month. And all this ratcheting up of trade tensions is going on while NAFTA talks are stalled, leaving any agreement dangling in the wind.
The biggest losers from a trade war
Trump’s increasing protectionism will definitely have an effect on emerging markets and developing economies, the World Bank said, with sectors like agriculture and food processing being the hardest hit. And with the political unrest, climate-related droughts, and flooding, the world doesn’t need this.
And any setbacks to commercial activity in China or the U.S., the world’s largest economies, “would result in significant negative spillovers for the rest of the world through trade, confidence, financial and commodity-market channels,” the Bank added.
Are the fears being overblown?
If you look at what major international financial markets and investment banks are forecasting, then the answer could be a resounding, yes. A broad consensus among international lenders and finance organizations sees more harm than good coming from a trade war, or even simply the threat of one, according to CNBC.
J.P. Morgan Chase chief executive Jamie Dimon recently said that the Trump administration’s trade policy could be one of the “flies in the ointment” that ends the current global economic recovery. However, there are a few analysts that think the fears are overblown.
“I don’t think we’re going into a full-blown trade war. These are negotiating tactics,” Julien Lafargue, European equity strategist at J.P. Morgan Private Bank, told CNBC’s “Squawk Box Europe” on Wednesday.
