Donald Trump has been warned by the west’s most influential economics thinktank that further escalation of the US-China trade war would unleash significant damage for the American economy, as well as the rest of the world.
The Paris-based Organisation for Economic Co-operation and Development (OECD) said that an intensification of the dispute between Washington and Beijing would likely knock as much as 0.7% off the level of global GDP by 2021-22.
Under such a scenario, the hit to the world economy from higher tariffs could be quantified at almost $600bn (£472bn).
Issuing a downbeat assessment of the global economy as the standoff between the world’s two biggest economies continues to simmer, the OECD said the world’s economic momentum had weakened markedly and that growth was set to stay at a subpar rate as the tensions over trade persist. It said both the US and China stood to lose out from the imposition of higher tariffs.
The Paris-based body forecasts world GDP growth will slow to 3.2% this year, from 3.5% in 2018, before picking up slightly to 3.4% in 2020. The rate of growth is stabilising at low levels, it warned, well below the rates of expansion seen over the past three decades.
Under the worst-case scenario for the escalation of the trade war – should tariffs be imposed on all US-China trade and businesses pause investments as a consequence – US GDP would be more than 0.8% lower than would otherwise have been the case if an escalation was avoided. Chinese GDP would likely be more than 1.1% lower.
The long-running trade dispute between the two economic superpowers unexpectedly escalated earlier this month when Trump raised tariffs on $200bn of Chinese goods from 10% to 25%. China hit back with tariffs on $60bn of US imports.
The president has previously suggested that China “pays” for the tariffs, but the border taxes are paid by US firms and consumers to the US government on top of the price of the Chinese goods they buy. Several big US companies have complained that the tariffs damage their profits, including iPhone maker Apple. Stock markets in the US and elsewhere around the world have also plunged over recent weeks.
US President Donald Trump Trump has often repeated that China pays for US tariffs on its goods. 'We have billions of dollars coming into our treasury from China. We never had 10 cents coming into our treasury; now we have billions coming in' he said on 24 January 2019. On 5 May he tweeted: 'For 10 months, China has been paying Tariffs to the USA.'
But that is not how tariffs work.
China's government and companies in China do not pay tariffs directly. Tariffs are a tax on imports. They are paid by US-registered firms to US customs for the goods they import into the United States. Importers often pass the costs of tariffs on to customers - manufacturers and consumers in the United States - by raising their prices.
Chinese suppliers do shoulder some of the cost of US tariffs in indirect ways. Exporters sometimes, for instance, are forced to offer US importers a discount to help defray the costs of higher US duties. Chinese companies might also lose business if US importers find another tariff-free source of the same goods outside China.
White House economic adviser Larry Kudlow has acknowledged that 'both sides will suffer on this' contradicting the president.
While not as severe as the worst-case scenario in its analysis, the OECD said the tariff increase announced by Trump earlier this month, if maintained, could cause a rise in US consumer prices by 0.3% next year. It also warned US and Chinese GDP growth would be held back by between 0.2% and 0.3% on average by 2021-22.
Laurence Boone, the chief economist at the OECD, said growth in world trade flows had fallen from 5.5% in 2017 to about zero in the first few months of this year: “The trade tensions have derailed global growth that we were seeing in sync in 2017. What’s happening is very worrying.”
Solving the US-China trade war would provide a modest stimulus to growth, trade and household real incomes. However, the thinktank said there were other risks, including a sharp rise in corporate debt levels around the world over the past few years. The prospect of a disruptive, disorderly Brexit would also damage the economies of the UK and the EU.
Growth in the UK is forecast to slow from 1.4% last year to 1.2% in 2019, slipping again in 2020 to 1%. It said the estimate was based on a Brexit deal being passed – with a risk to the downside from the UK crashing out without a deal.
Boone said: “All the uncertainty has meant companies delaying investment plans, postponing decisions. That’s not good. The longer obviously we’re in an uncertain framework, the more that will drag on economic growth.”
