by Calculated Risk on 6/22/2018 08:53:00 AM

A few excerpts from a research note by Merrill Lynch economists: The cost of a trade war

Early this week, trade tensions ratcheted up another notch. President Trump announced that he has directed the US Trade Representative to prepare another round of tariffs on $200bn in Chinese imports at a tax rate of 10%. This comes after China announced that it would retaliate dollar for dollar against the initial round of tariffs that are set to go into effect on July 6. While the actual amount of tariffs that have been imposed by the US to date remain modest at just over $100bn worth of goods imports (only 4.2% of total goods imports), the latest announcement shows that trade tensions are likely to get worse before it gets better. Although we remain of the view that the likelihood of a full blown global trade war remains low, below we try to put some numbers on how a major trade confrontation could potentially impact the US economy.
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The good news is that we are still many steps away from a full blown global trade war. The bad news is that the tail risks are rising and our work and the literature suggest a major global trade confrontation would likely push the US and the rest of the world to the brink of a recession. So far, the trade actions taken by the Trump White House and trading partners have been relatively modest and in turn have had a limited impact on the economy and financial markets. The next round of $100-$200bn of tariff between US and China may prove more substantial. Further escalation like auto tariffs would lead us to reassess the US economic outlook.