Will trade wars undermine global economy?

Will trade wars undermine global economy?

Escalating global trade war could cut world GDP growth to 2.8% from 3.2% (by 0.4%), according to Fitch Ratings 2018 “Global Economic Outlook” baseline forecast.

According to the agency, the U.S., Canada and Mexico would be most affected by escalating trade tensions. Looking at the most vulnerable countries, Fitch sees GDP growth 0.7% below baseline forecast in 2019 for the U.S. and Canada, and 1.5% in Mexico, with GDP staying significantly below its baseline in 2020, Bloomberg reported.

Russia's economy may also be affected by trade wars, GDP growth of which may decline by 0.6% in 2018, and by 0.7% - in 2020.

Fitch said China would be less severely affected, with GDP growth about 0.3% below the baseline forecast, which however is not reflected in the market. Fitch also predicted that China would only be affected directly by U.S. protectionist measures.

EU countries may also almost not feel the consequences of trade conflicts: GDP growth of the EU may decline by 0.1% in 2019, and even increase by 0.1 in 2020.

Separately, even countries not directly involved in the trade war would see their GDP falling below baseline, with net commodity exporters would be more severely hit, while some net commodity importers would benefit from lower hard commodity prices.

In early June, Washington imposed 25% duties on imported steel and 10% on aluminum from Canada, Mexico and EU. These countries announced retaliatory measures against US tariffs. On June 22, the European Union started charging import duties of 25% on 2.8 billion euros worth of U.S. goods, including steel and aluminum products, farm produce such as sweetcorn and peanuts, bourbon, jeans and motor-bikes.

Chairman of the State Duma's Financial Market Committee, Anatoly Aksakov, speaking to Vestnik Kavkaza, explained that trade wars, involving higher duties on imported goods, will lead to a reduction in the supply of these goods to relevant markets, as the demand for more expensive goods, as well as the production, therefore, such decisions can indeed affect global GDP growth .

In addition, according to the expert, trade wars have already manifested themselves politically. "There is a tension between European countries and the US. Despite all the rhetoric about the unity of the West, we see that there are tensions between politicians. There is a certain tension between China and the US as well. It's not for nothing that trade wars is one of the key topics at the BRICS summit," he said.

Anatoly Aksakov complained that, despite the successful import substitution practice in Russia, it has received less attention recently. "We have a direction which we have to develop more seriously - in order to enter Western markets, for example, European ones, it is necessary to overcome serious non-tariff barriers. There are very strict technical conditions. In order to enter the Russian market, imported goods are offered very simple conditions. As a result they receive an opportunity to create problems for our producers, pushing them out of our market. To protect the domestic market it is necessary to introduce technical requirements, for example," the chairman of the State Duma's Financial Market Committee concluded.

The Chairman of the Board of the National Currency Association (NCA), Dmitry Piskulov, also warned that the escalation of trade wars into the world stage could cause a decline in global GDP. "According to the classical trade theory, countries with lower costs manufacture cheaper goods. They exchange goods with other countries that have lower costs in their turn. David Ricardo, on the example of England and Portugal, producing wool and wine, proved that countries are not able to produce everything themselves, if they trade, they receive a greater profit, because instead of increased costs, they have a higher consumption of those goods that they could not produce at home," he said.

"It means that world trade is indeed important. Therefore, fears of rating agencies are not groundless: if the existing friction develops into large-scale trade wars, it threatens to reduce global GDP, since countries will not be able to sell their products abroad. And if other countries try to produce it themselves, their costs will rise, and economic growth-rate  will decline," the expert said.

According to Dmitry Piskulov, the drop in global GDP primarily threatens the growth of unemployment. The decline in global GDP, he said, will also lead to significant political consequences. "During trade wars countries start to regard each other as adversaries, that is, first, they try to receive more favorable economic tariffs or zero tariffs, and second, thy to impose protective tariffs on their products. Politically, it leads to a deterioration of relations," the chairman of the Board of the National Currency Association concluded.