Then, it got worse. That data does not account for the most recent wave of tariffs that went into effect September 24, which tax imports from China at a rate of 10 percent. After months of tension, on December 1, President Donald Trump and Chinese President Xi Jinping agreed to keep the trade war from escalating by halting the imposition of new tariffs for 90 days as they negotiate a lasting agreement. But the rate could still increase to 25 percent in March, meaning even more pain could be on the horizon. Here at home, tariffs are a pocketbook issue for consumers paying higher prices and a challenge to the bottom line for companies facing higher costs for materials and goods, as well as a loss of their overseas markets.
But the trade war has worldwide implications and will have a chilling effect on the global business environment. In Europe, overseas steel producers pinched by American steel tariffs are dumping products and undercutting European steel companies. Europe’s increase in steel imports outpaced its increase in demand by almost 17 times. That effect is hardly limited to the steel industry.
The most troubling effect of the trade war is the potential for both the U.S. and China to see an economic decline at the same time. China is already reporting slowing economic growth and the International Monetary Fund lowered its projection for next year’s global economic growth due to trade tensions. An analysis by UBS, a Swiss multinational investment bank, of the first wave of tariffs called the decline in U.S. imports from China “sharp and unambiguous.” If rates are increased, it will be even more painful for both the U.S and China. The rate hike expected in March if there is no trade truce between the U.S. and China will be yet another drag on two of the world’s largest economies.
The stock markets responded negatively, signaling further instability for both the U.S. and global economy. More than a third of S&P 500 companies reporting third quarter earnings have cited the impact of tariffs. By late November, markets fell below pre-2018 levels.
Businesses around the world are already getting squeezed by tariffs and the pain will get worse. But the hazards could strike at the core of the global economy.
Analysts warn that the trade war could cause wide-ranging harm to financial markets. Pantheon Macroeconomics called tariffs “the quickest possible route to a recession.” CNBC’s Jim Cramer warned that the trade war will spark a “mini version of 2008.” And Morgan Creek Capital founder Mark Yusko sounded an alarm when he said, “trade rhetoric is one of the dumbest things in the history of all administrations and it will cause a global recession.” CTA president Gary Shapiro also warned of a trade war induced recession.
Tariffs might seem like a convenient path to level the trade playing field, but the evidence is already in: they cause far more harm than good. The U.S. and its global trading partners are already suffering from the self-inflicted wound of tariffs, and the worldwide economy will feel its effects unless the Trump administration changes course quickly.
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