If the trade war between the US and China continues to escalate, global output could shrink by $600 billion within two years, according to new research.
The tariffs implemented so far could slash the quarterly gross domestic product (GDP) of China by 0.5% and of the US and the rest of the world by 0.2% in 2021, according to a Bloomberg Economics study. If US President Donald Trump follows through on his threat to hike tariffs on virtually all Chinese imports to 25%, and China retaliates in kind, GDP could fall 0.8% in China and 0.5% in the US and worldwide, the researchers found.
Failure to strike a trade deal could also spark a selloff in stock markets, reducing consumer spending and investment — two components of GDP along with government spending, exports, and imports (which are subtracted in the calculation). A 10% drop in equity markets would result in a 0.9% drop in Chinese GDP, a 0.7% slump in US GDP, and a 0.6% slide in global GDP by the middle of 2021, according to the economists’ model.
Their predictions are less dire than those in a recent study by the Trade Partnership, which predicted across-the-board tariffs on Chinese goods and retaliation from China would reduce annual US GDP by 1% within three years. Goldman Sachs is more optimistic: it expects US GDP to fall 0.5% and Chinese GDP to slide 0.8% in the same scenario, according to a recent analysis.
Another Bloomberg study looked at the US-China trade war’s implications for other countries. The researchers determined Taiwan would be worst hit as about 1.6% of its output is tied up in Chinese exports to the US, while South Korea and Malaysia rely on that supply chain for 0.8% and 0.7% of their output. Meanwhile, Chinese tariffs on US goods could hurt countries such as Canada, which relied on that supply route for about 1.1% of its energy output in 2015.