US would lose out in trade war: ECB
Draghi, Azevedo warn protectionism is rising threat to global economy
FRANKFURT: Economic activity in the United States could fall more than two percent within a year if Washington launched a trade war on a wide front, European Central Bank researchers suggested yesterday.
The forecast comes as officials like ECB President Mario Draghi and World Trade Organization chief Roberto Azevedo warn of protectionism’s rising threat to the world economy under Donald Trump’s “America First” policies.
To test the US-against-all global trade war scenario, the Frankfurt-based experts fed a set of assumptions into economic models produced by the ECB and the International Monetary Fund (IMF).
They simulated Washington hitting all imports with 10-percent tariffs and America’s trade partners responding in kind-a far more drastic scenario than Trump has so far toyed with.
As well as the tariffs’ direct effects on trade, the economists tried to capture the effect on public and financial market confidence by simulating a jump in government borrowing costs and a slump in global stock markets-as large as 16 percent for the US.
Under that combined scenario, “real economic activity in the United States could be more than two percent lower than the baseline in the first year alone,” they said.
They further predict that after three years, GDP would still be one percent below its starting level.
‘Clearly worse off’
“An economy imposing a tariff which prompts retaliation by other countries is clearly worse off,” the economists concluded.
“Its living standards fall and jobs are lost.”
In trade, while US consumers and firms might gradually switch to buying American in response to more expensive imports, the effect is at first outweighed by the drop in exports as the country’s trade partners buy less. Companies are also expected to invest less and hire fewer workers, amplifying the braking effect on the economy.
Meanwhile, China is expected to win out in the early stages of the simulated trade war.
With tariffs only affecting trade with the US, other countries could switch to buying Chinese rather than American exports, more than making up for reduced sales to the US.
More broadly, the blow to confidence from a general trade war would produce “a significant and more wideranging impact on output across countries,” the economists found, shrinking the global economy 0.75 percent in the first year.
A near-3.0-percent contraction in overall trade would also weigh on world output.
“The scenario of a global trade war will have a dramatic effect,” WTO boss Azevedo told German business leaders in Berlin Tuesday, warning that Washington was offering a “challenge to basic principles” of international exchange.
Common cause
Meanwhile, Washington, Tokyo and Brussels said they were making common cause against unfair trade, jointly denouncing industrial practices long pinned on China but refraining from naming that country explicitly.
US Trade Representative Robert Lighthizer, Japanese Economy Minister Hiroshige Seko and European Union Trade Commissioner Cecilia Malmstroem “reiterated their concern with and confirmed their shared objective to address non-market-oriented policies.”
In a statement issued on the sidelines of the United Nations General Assembly in New York, they said unnamed “third countries” had engaged in “severe overcapacity,” while creating unfair competitive conditions, threatening technological development and ultimately undermining global trade.
“The ministers recalled that market-oriented conditions are fundamental to a fair, mutually advantageous global trading system and that their citizens and businesses operate under market-oriented conditions,” said the statement.
“The ministers found such practices to be deplorable,” it added, noting the three economies were considering “possible measures” that could be undertaken. —AFP