World economic output could fall as much as one percent in a year if US President Donald Trump sparks a trade war with America’s partners, a top European Central Bank official said .
“According to ECB staff simulations, world trade in goods could fall by up to 3.0 percent already in the first year after the change in tariffs and world GDP by up to 1.0 percent,” central bank board member Benoit Coeure said in a speech in Cernobbio, Italy.
ECB economists modelled a scenario where the United States raised tariffs on all imports by 10 percentage points and its trading partners responded in kind.
“Such a scenario would have significant adverse effects on the global economy, including, and in particular, on the economy that raises tariffs in the first place,” Coeure said according to a transcript provided the ECB.
US gross domestic product would be 2.5 percent lower after one year than if no new tariffs were introduced, the ECB found. The US economy contracted by nearly 2.8 percent in 2009 during the global economic crisis.
“Euro area GDP would also decline, but by less than in the US,” Coeure added.
Trump has ratcheted up rhetoric on trade in recent weeks, slapping border taxes on steel and aluminium imports before walking them back for Western trading partners.
Tariffs on Chinese exports
But he upheld the tariffs on Chinese metals, and this week published a list of $50 billion in Chinese exports set to be hit by US tariffs.
When China said it would retaliate with levies on $50 billion worth of major US exports, Trump doubled down, promising a further $100 billion of tariffs.
Aggressive language on trade from Beijing and Washington has jolted financial markets around the world.
Stock market movements “appear more pronounced than would be consistent with the direct economic effects of the measures announced to date,” Coeure said.
“They seem to anticipate the effects of retaliatory measures… fears of a ‘trade war’ have added to the volatility seen earlier this year.”
Coeure acknowledged that while increased trade in recent decades had lifted global living standards and economic output overall, some people had lost out.
Nevertheless, “winding back globalization is the wrong solution” that would “only fuel more inequality as import prices rise, goods become dearer and real incomes fall,” he warned.
What’s more “it would breed distrust among nations, making for a more unstable international order,” he added.
Instead of stoking trade tensions, national governments should design “targeted policies that produce fairer outcomes” for their citizens, Coeure said.