We really do not know what effect a trade war would have on the global economy. All of our baselines are based off of what has happened in the past, long before the age of highly integrated global value chains. It could be small. It could be big. The real forecast is: we just do not yet know: Dan McCrum: Trade tension and China : "The war on trade started by the Trump administration is percolating through the world's analytical apparatus.... Tariffs could be bad for the global pace of economic activity, but only if the economic warfare escalates...
...So think in terms of a toddler taking the shine off a sunny day out, rather than forcing everyone to pack up the picnic and go home. Here's the IMF, from Monday's update to the World Economic Outlook, which still pegs global growth at 3.9 per cent this year and next, but...
The balance of risks has shifted further to the downside, including in the short term. The recently announced and anticipated tariff increases by the United States and retaliatory measures by trading partners have increased the likelihood of escalating and sustained trade actions.
And:
In the baseline forecast, the direct contractionary effects of recently announced and anticipated trade measures are expected to be small, as these measures affect only a very small share of global trade so far. The baseline forecast also assumes limited spillovers to market sentiment, even if escalating trade tensions are an important downside risk....
Escalating trade war is bad, in large part due to the let's-wait-and-see effect...
#shouldread
