US trade policy has the potential to do more harm than good for US manufacturing and the broader economy, particularly if more protectionist policies are implemented by the US or if its trading partners retaliate. Moody's Analytics - using its Global Macro Model which covers more than 70 countries linked via trade flows, foreign direct investment, commodity prices and financial markets - looked at three trade scenarios, and the resultant impact on the US, Chinese and Asian economies.
Scenario 1: Expected Tariffs (50% probability)
The first scenario assumes the current US tariffs on $311 billion of imported goods, with no further retaliation, and tariffs on $134 billion of US exports. If this is the extent of the tariff increases, then while not good for the US and global economies, the overall impact will be limited.
- US: Real GDP would fall just over 0.13 percentage points at the peak of the impact a year from now, and 200,000 jobs would be lost over the period. The economic impact outside of the US will be comparable.
- China: GDP growth would fall by 0.03 percentage point in 2018 to 6.67%, and in GDP in 2019 would be 0.09 percentage point below the no-tariffs baseline to 6.28%. The unemployment rate would remain at baseline levels through 2023, but consumption would soften and drive down house price growth by 0.14 percentage point in 2019 to 2.76%. China’s stock market would be most affected as retail investors continue to pull out of the equity markets.
- Asia: The rest of Asia is not immune, but the hit to GDP growth would be negligible: real GDP growth would decline by only 0.02 percentage point in 2018 and 0.08 percentage point by 2019, impacted mostly by exports.
- Specific sectors: However, reduced global trade flows would drag on commodity prices and have a pronounced impact on commodity export-oriented countries such as Australia and Indonesia. A slowdown in regional demand would also hurt India’s petroleum-related exports.
Scenario 2: Threatened Tariffs (40% probability)
This scenario assumes that all tariffs that President Trump has threatened are implemented, including a 15% average tariff on $800 billion in US imports. This total includes $275 billion in vehicle imports subject to a 25% tariff.
This scenario also assumes a 15% tariff on an additional $475 billion of US exports. If actually implemented, close to one-third of all imported goods into the US would be subject to higher tariffs. Assuming that impacted US trading partners would respond with in-kind tariffs on US goods, the macroeconomic consequences would be more serious.
- US: Real GDP would decline by 0.5 percentage point and employment by 700,000 jobs at its peak.
- China: GDP growth would fall by 0.07 percentage point in 2018 to 6.62% and in 2019 would be 0.42 percentage point below the no-tariffs baseline at 5.95%.
- Asia: Real GDP growth would decline by around 0.06 percentage point in 2018 and 0.38 percentage point in 2019 before recovering in 2020.
- Specific sectors: Economies that are important tech hubs throughout Asia, such as Taiwan, Malaysia, Hong Kong and Singapore, would suffer from tariffs on Chinese tech exports to the US simply because of their role in the supply chain.
Scenario 3: Trade Conflagration (10% probability)
This scenario assumes an across-the-board 25% hike in tariffs on US-China trade, coupled with Chinese “qualitative” measures that complicate doing business in China for American companies.
- US: Under this scenario, the US economy would descend into recession by the second half of 2019. Real GDP would decline by 1.8 percentage points by early 2020, costing the economy almost 2.6 million jobs. Unemployment would rise to well over 5%.
The rest of the global economy would also suffer, although a stronger US dollar would somewhat mitigate the impact.
- China: GDP growth would drop by 1.19 percentage point to 5.18% in 2019 and 0.19 percentage point to 5.64% in 2020. The stock market would also fall sharply, declining by 9.4% in 2019.
- Asia: GDP growth would fall around 0.24 percentage point in 2018 and 0.92 percentage point in 2019 before recovering modestly in 2020.
- Specific sectors: Under this scenario, too, tech hubs (Taiwan, Malaysia, Hong Kong, Singapore) would be severely affected, while commodity producers (Australia, Indonesia) would face lower prices. Foreign direct investment would fall in India.
This is a summary of Moody’s Analytics report: “Pride and Protectionism: U.S. Trade Policy and Its Impact on Asia”.
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