Wednesday, May 24, 2017 1:54 PM / Fitch Ratings
The possibility of a sharp escalation in trade-protectionism remains a key risk for the world economy, despite recent signs of a more moderate approach to reforming trade relations from the US, says Fitch Ratings' Economics team in its latest global macro scenario report.
The strongly protectionist rhetoric on trade seen during President Trump's election campaign and the new administration's early days in office has not, so far, translated into aggressive unilateral trade measures from the US. However, given the strength of anti-globalisation sentiment in the election and the continued focus of US policy makers on reducing bi-lateral trade deficits, the possibility of a more disruptive and unilateral US approach that is less compatible with the existing global trade governance framework - and much more likely to prompt retaliatory actions from US trade partners - remains a significant risk.
Fitch has used a macro model-based simulation to illustrate the potential implications of a hypothetical 'trade war' scenario for the global economy. The scenario is built on a combined shock of three components: first, the US imposes a 35% tariff on imports from Mexico, China, South Korea and Taiwan and this prompts retaliation with equivalent tariffs on US imports from these countries; second, the US deports one million migrants, reducing the US labour force; and third, as the adverse shock hits the global economy, business and household confidence falls in all major economies. Canada was not part of the shock, reflecting its small bilateral trade surplus with the US and its absence from the US Treasury's 'monitoring list' of trading partners that merit close attention on currency practices.
"A hypothetical trade war would lead to adverse outcomes in all major economies. The US and the countries directly targeted by the imposition of punitive US import tariffs would see the largest losses of GDP but global repercussions would be significant as business and household confidence falls, asset prices weaken and trade flows are affected more widely, including through disruptions to multinational supply chains," said Brian Coulton, Fitch's Chief Economist.
"The peak impact on the US economy would materialise in 2019 when the annual growth rate would be 1.3%, 1.3pp lower than the 2.3% GDP growth in our baseline global macroeconomic forecast. For 2017, GDP growth would be 1.9% in the shock scenario, compared with 2.1% in the baseline and in 2018 growth would be 2%, compared with 2.6% in the baseline," added Gergely Kiss, Director in Fitch's Economics team.
In China, GDP would be hit even more significantly than in the US. At its peak impact, Chinese GDP would be 2.8pp below the baseline by 2019, almost entirely due to the trade channel. The highly open Korean economy would suffer a similar peak shock (2.9pp) by 2019. In Mexico the peak GDP loss relative to the baseline scenario would be 2.3pp by 2019. Mexico's trade linkages with the US are stronger than those of China, but the scenario sees some offsetting benefits from 15% peso depreciation and faster domestic labour force growth, as net migration to the US is reversed.
Other major advanced economies such as the eurozone, Japan and the UK would also feel the negative consequences of the shock. This would predominantly originate from the confidence channel in the eurozone and the UK, leading to negative wealth effects, similar to the US," said Kiss.
For large emerging markets not directly affected by tariff changes the peak impact would still be significant. In India, GDP would be 1.3pp lower than the baseline, while in Brazil and Russia the deviation would be 0.8 and 0.9pp, respectively versus the baselines. The trade channel is the dominant source in all emerging countries and the confidence channel is significantly weaker, mainly due to the less developed financial markets.