by Calculated Risk on 11/09/2018 08:38:00 AM

A few excerpts from a note by economists Anna Zhou and Ethan Harris at Merrill Lynch: "Here for a long time, not a good time"

In their October 2018 paper, Furceri, Hannan, Ostry and Rose looked into the macroeconomic consequences of tariffs. They analysed data spanning 151 counties (including both EM and DM economies) over the period 1963-2014 to quantify the impact of tariffs on output, productivity, unemployment, real exchange rates and trade balances. The authors find that tariffs have adverse macroeconomic consequences in the short and medium term.

These results are also consistent with economic theory. …

What about the trade balance? According to Furceri, Hannan, Ostry and Rose, the impact is minimal: they find that an increase in tariffs has a small and statistically-insignificant impact on the trade balance-to-GDP ratio. ... developed economies tend to respond more negatively to tariffs than emerging economies.

None of this bodes well for the US. Since the US is an advanced economy that is at or close to the peak of the business cycle, the results of the paper point to the risk of a substantial negative impact from the tariffs.

There is also bad news for the global outlook. As we have argued many times previously, the administration’s primary goal on trade is a significant reduction in the trade balance. We have also contended that this goal will probably not be achieved—and the trade deficit will instead probably widen—because fiscal stimulus will boost consumption and import demand. The paper shows that historical data also do not support an improvement in the trade balance.