A trade war that was instigated by the United States will probably do a severe damage to the global economy as there is a rise in protectionist actions. Moreover, countries imposing tariffs as well as countries dependent on tariffs will have to bear losses in economic welfare, however countries on the sidelines will be going through collateral loss. Besides, if tariffs remained unchanged, damages in economic output would be permanent, this is because the distorted price signals would constrain the specialism that maximizes the productivity across the globe.
The possibility of an extreme trade war, though still relatively low, is growing. The most at stake countries include China and the United State. Moreover, only these two nations can probably address the major economic issues like intellectual rights of property, market access and joint-venture technology transfer by entering into an agreement.
Furthermore, monetary policy as well as responses of equity markets will certainly affect the consequences of a trade war. The federal funds rate increases more rapidly than in the standard forecast as a result of higher domestic inflation. Further, rising financial strain will have negative impact over the new credit flows as well as confine investment, industrialized production and trade. Additionally, equity markets across the globe are foreseeable of falling down in a protectionist situation.
Macroeconomic Impacts of Trade War
Prophesying in terms of macroeconomics, this trade war initiated by the US will actually have no winners. This is so because countries having frontage on new tariffs, including the United States, is witnessing falloffs in their actual exports as well as GDP. On the other hand, other countries are getting affected indirectly due to this, as they are experiencing frailer demand for their own exports, either through their supply chains or on account of weakening global economic growth. These effects outbalances any prospective gains from trade deviation in order to elude tariffs. According to a recent survey, level of global real GDP declined by 0.1% in 2018 and will likely fall by 0.8% in 2019 and 1.4% in 2020 due to this protectionism environment. Therefore, the world is in the verge of recession owing to the global economic growth in 2019 & 2020 expected only slightly above 2.0 per cent.
In addition, real fixed investments are restrained in the this kind of trade war environment, where the real exports are facing losses, declining stock markets, financial stress and declining foreign investments in developing markets that are directed by the US import tariffs. Moreover, China will have to face a substantial damage because both foreign as well as domestic investors are getting more cautious about their capital investments in the country.