US-China trade war to trim $850b global output

Reuters . San Francisco | Update:

Employees work on the production line of a robot vacuum cleaner at a factory of Matsutek in Shenzhen. Photo: ReutersTrade policy uncertainty driven by the Trump administration’s escalating dispute with China means hundreds of billions of dollars in lost US output and as much as $850 billion lost globally through early next year, research published this week by the Federal Reserve suggests.

The Fed researchers analyzed newspaper articles and corporate earnings calls to estimate trade policy uncertainty, finding it has recently “shot up to levels not seen since the 1970s.”

Other economists, notably Stanford University professor Nicholas Bloom and his colleagues, have documented a similar rise in uncertainty.

The Fed researchers then estimated the blow such uncertainty delivers to economic activity, as businesses pull back on investment and production. They concluded that globally and in the United States, its impact is around 1% to GDP.

With US GDP estimated at about $20 trillion, and world GDP at about $85 trillion, a 1% impact would put the drag from trade uncertainty at about $200 billion to US GDP, and $850 billion to global GDP, according to Reuters calculations.

The estimates, the researchers said, are uncertain.

But they are notable in that they are among the first to quantify the large impact of President Donald Trump’s approach to trade deals, which he says put the US economy at a global disadvantage.

In an effort to win better trade terms, the Trump administration has jacked up tariffs on hundreds of billions of dollars of Chinese imports and imposed or threatened to impose duties on imports from other trading partners, including Mexico and the European Union. China and other countries in turn have threatened or imposed their own tariffs on US goods.

Trump has called on the Fed to slash US interest rates to support the economy and offset the effects of the trade war.

Fed policymakers for their part have said they will not let politics dictate interest-rate policy. But they have consistently called out the tariffs as detrimental to US growth. Fed Chair Jerome Powell last month cited trade policy uncertainty as an important reason for the global economic slowdown and weak US manufacturing.

Chicago Fed President Charles Evans on Wednesday argued that increased trade tensions could slow US potential growth to 1.5% a year, half what Trump said his administration would deliver.

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