US economy

Trade wars ‘would hurt US worst’, ECB says


An escalation in global trade tensions would hurt the US more than its economic rivals, research from the European Central Bank has claimed.

An ECB paper published on Wednesday found that if Donald Trump’s administration was to raise tariffs and other barriers on imports by another 10 per cent — and other countries were to retaliate — growth would drop more sharply in the US than in either the euro area or China.

The research comes amid signs that the EU will be drawn into a conflict that so far has mostly involved the imposition of barriers between Washington and Beijing.

Earlier this month Mr Trump unveiled plans to target up to $11bn of EU products in response to World Trade Organization rulings in a long-running case against subsidies for Airbus. In retaliation, Brussels has warned that American state support to Boeing could result in punitive tariffs on US products from hazelnuts to tractors.

The tensions threaten to undermine the uneasy US-EU truce that was agreed between Mr Trump and European Commission president Jean-Claude Juncker last summer.

The ECB’s research found that after one year of heightened trade tensions US GDP would be 2 per cent lower than the baseline expectation.

“An increase in tariff and non-tariff barriers on imports induces domestic consumers and firms to switch to domestically produced goods,” the paper said. “However, this effect is likely to be more than offset by the increase in prices and the reduction in exports.”

GDP in the euro area would remain unchanged after the first year of trade conflict, and growth in China would be slightly higher, the paper said. This is because the euro area and China would benefit from so-called “trade diversion”, as other nations switch from US goods to theirs, according to the researchers.

Over the longer term, all three economies would lose out, the paper concluded — though the US would still be far more affected than China or the euro area.

Other research has painted a different picture. The IMF said earlier this month that in a trade war the US would lose 0.6 per cent of GDP and China would lose 1.5 per cent.

ECB president Mario Draghi has repeatedly warned about the impact of trade tensions on economic confidence, though earlier this month he cautioned against reading too much into the latest threat of sanctions from the US president.

“As you’ve seen in the past, between words and deeds there is often a big gulf,” Mr Draghi said.

The climate of protectionism has already affected Europe’s economy, especially its powerhouse Germany.

The €1.5tn German export machine has in recent years been a driving force behind the region’s economic recovery, but since late last year it has stuttered, in part because of weaker global demand and a climate of political uncertainty.

Berlin last week said it expected growth of just 0.5 per cent this year, down from an earlier estimate of 1 per cent.

The biggest risk to the German economy would come if the Trump administration imposes tariffs on European vehicles and automotive parts.

The ECB research found that tariffs on cars would hurt Germany, but not as badly as they would hit Korea, the US or Japan.



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