Trump's China trade war risks damaging

US economy, says OECD

Intensification of tariff dispute also likely to knock almost $600bn off world economy

Richard Partington Economics correspondent

Tue 21 May 2019 10.00 BST Last modified on Thu 23 May 2019 09.56 BST

Chinese shipping containers near a US flag after they were unloaded at the Port of Los
Angeles, California. Photograph: Mark Ralston/AFP/Getty Images

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).

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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.

Who pays Trump's tariffs, China or US customers and companies?

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.”