Tariff hikes under second Trump term could stifle US, global output: Fitch

May 10, 2024 (MLN): Aggressive tariff rises under a possible second Donald Trump presidency would likely result in a reduction in US and global output in comparison to an illustrative baseline scenario with no further increases, Fitch Ratings says in a new report.

The risk of a renewed US-led trade war in 2025 is increasing, with Trump flagging possible increases in tariffs on China of up to 60% and an across-the-board 10% tariff on all US imports.

Fitch estimated the impact on the world economy of a renewed trade war by conducting a series of macroeconomic simulation scenarios using the Oxford Economics Global Economic Model.

In scenarios where the US lifts tariffs aggressively, the US would see short-term hits to the level of GDP of 0.4%-0.8%.

If the US’s trading partners retaliate with tariff rises of their own, the impact would be larger, up to 1.1% and more persistent.

Higher tariffs would mean higher inflation of up to 0.4pp, but only in the short run. Over the medium term, the impact on inflation would be negative, as weaker demand translates to easing price pressures.

For the US’s trading partners, the impact is greater in scenarios with retaliation, with China, and particularly Canada and Mexico seeing the largest hits to GDP (averaging 1.8% in the worst-case scenario).

The latter results reflect large-scale trade linkages with the US relative to Canadian and Mexican GDP.

The agency's findings confirm the direction of the empirical evidence published for Trump’s first term, which saw a rise in trade protectionism on a scale not seen since the 1930s.

The bulk of the policy measures were focused towards China. Research into the impacts of the tariff hikes in Trump’s presidency on the US economy concludes that the overall effects were adverse, with modest declines in GDP and employment, and an increase in prices.

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