A full-scale trade war with China would plunge the US into recession, an investment bank has warned

  • US President Donald Trump’s new tariffs and a robust verbal response from China have sparked fears of a global trade war.
  • Such a war could plunge the US into a recession and increase the number of unemployed citizens in the country by more than six million, according to investment bank Macquarie.
  • Even in a mild trade war, the USA could see its GDP growth shrink and become the slowest-growing major economy.

A global trade war would plunge the US into a recession and increase the number of unemployed citizens in the country by more than six million, according to a new analysis from investment bank Macquarie.

As President Donald Trump imposes another round of tariffs on Chinese imports into the USA, fears that a full-scale global trade war may be in the offing have intensified, but the impact of such a war remains uncertain.

Macquarie analysts Ric Deverell, Hayden Skilling, David Doyle, and Neil Shankar tried to shed some light on the issue, citing a paper released back in 2016 by the Peterson Institute for International Economics prior to Trump’s victory in the presidential election.

In the scenario of a “full trade war” it is estimated that the US would enter a recession in 2019, while unemployment would more than double from current levels.

“In a full trade war scenario, in which China and Mexico impose identical tariffs on the US, inflationary pressure in the US increases alongside rising import prices, prompting the Fed to raise interest rates.

“Activity is further dampened by greater uncertainty, which pushes up spreads and the cost of capital, dragging on consumption and investment,” Macquarie’s note says.

“As a result, the US enters a recession in 2019, and the unemployment rate peaks at 8.6 per cent in 2020.”

Even if a so-called “full” trade war is avoided, there could still be big negative consequences. In a scenario the PIIE calls an “aborted trade war” – whereby the USA imposes tariffs for around a year before backing down – “the direction of the effects is similar, but the magnitude is much more benign.”

“In this case, GDP growth troughs at 1.2 per cent in 2018, while the unemployment rate peaks at 6.0 per cent in 2019,” the note warns.

A trade war is becoming more and more realistic a scenario, as rhetoric continues to escalate. China hit back at Trump’s tariffs on Thursday, saying it will introduce its own trade barriers in response.

It is reportedly set to impose new a tariffs ranging from 15% to 25% on a slew of US goods, including pork, soybeans, steel pipe, recycled aluminium, and ethanol.

“China does not want a trade war with anyone,” the Chinese embassy in Washington DC said in a statement Thursday.

“But China is not afraid of and will not recoil from a trade war. China is confident and capable of facing any challenge. If a trade war were initiated by the US, China would fight to the end to defend its own legitimate interests with all necessary measures.”

While Trump’s rhetoric has largely been directed at China, he has also placed tariffs of 25% on steel and 10% on aluminium for the EU. The EU is currently trying to push Trump to suspend these tariffs, following similar exemptions for Canada and Mexico.

Markets are clearly worried about the prospect of a trade war, with stocks in North America, Europe, and Asia all selling off heavily during the last two days of trading.