A full-blown trade war would punch a hole in global economic growth because of reduced trade volume, supply chain disruptions, and lost confidence.
Quantifying just how much damage an entrenched trade battle could wreak upon the international community is a trickier task, but J.P. Morgan has come up with three scenarios.
In J.P. Morgan's first model, the U.S. is assumed to raise tariffs on all imports by 10 percentage points, with no retaliation. In the second, the U.S. action is met in equal fashion, with other countries that are the targets of U.S. tariffs imposing a 10-percentage-point increase in tariffs on imports from the U.S. In the third scenario, the entire world raises tariffs by 10 percentage points, a phenomenon J.P. Morgan calls a trade war.
John Normand, the bank's head of cross-asset fundamental strategy, said he believes that the third, worst-case scenario could reduce global growth by a “material” amount of at least 1.4 percent over the next two years.
Source: J.P. Morgan
“Our economists acknowledge that such frameworks underestimate the likely damage that comes through disrupted supply chains, plus the feedback loops from tighter financial conditions,” Normand said in a note to clients last week. “Policy uncertainty has a habit of denting consumer and business confidence, which in turn lowers household and corporate spending. The team’s proprietary, composite measure of developed market business sentiment already shows such a drop, but from above-average levels due to U.S. tax stimulus.”
Though Normand acknowledged that those worst-case fears have yet to materialize, the J.P. Morgan researchers added that global growth could slow by about 0.4 percent if countries targeted by the United States respond by slapping equivalent tariffs on Washington.