The US-China trade war could slash global output by $600 billion within three years

U.S. President Donald Trump attends a Japanese business leaders event in Tokyo, Japan May 25, 2019.  REUTERS/Jonathan ErnstU.S. President Donald Trump and first lady Melania Trump visit JapanReuters

  • Further escalation in the US-China trade war could slash global GDP by $600 billion within two years, according to Bloomberg Economics.
  • If Trump slaps tariffs on virtually all Chinese goods, China retaliates, and equity markets drop 10%, worldwide GDP could fall 0.6% by mid-2021, the study says.
  • US and Chinese GDP could fall 0.7% and 0.9%, according to the model.
  • Other countries that rely on US-China trade, including Taiwan and Canada, could also suffer.
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If the trade war between the US and China continues to escalate, global output could shrink by $600 billion within two years, according to new research.

The tariffs implemented so far could slash the quarterly gross domestic product (GDP) of China by 0.5% and of the US and the rest of the world by 0.2% in 2021, according to a Bloomberg Economics study. If US President Donald Trump follows through on his threat to hike tariffs on virtually all Chinese imports to 25%, and China retaliates in kind, GDP could fall 0.8% in China and 0.5% in the US and worldwide, the researchers found.

Failure to strike a trade deal could also spark a selloff in stock markets, reducing consumer spending and investment - two components of GDP along with government spending, exports, and imports (which are subtracted in the calculation). A 10% drop in equity markets would result in a 0.9% drop in Chinese GDP, a 0.7% slump in US GDP, and a 0.6% slide in global GDP by the middle of 2021, according to the economists' model.

Their predictions are less dire than those in a recent study by the Trade Partnership, which predicted across-the-board tariffs on Chinese goods and retaliation from China would reduce annual US GDP by 1% within three years. Goldman Sachs is more optimistic: it expects US GDP to fall 0.5% and Chinese GDP to slide 0.8% in the same scenario, according to a recent analysis.

Another Bloomberg study looked at the US-China trade war's implications for other countries. The researchers determined Taiwan would be worst hit as about 1.6% of its output is tied up in Chinese exports to the US, while South Korea and Malaysia rely on that supply chain for 0.8% and 0.7% of their output. Meanwhile, Chinese tariffs on US goods could hurt countries such as Canada, which relied on that supply route for about 1.1% of its energy output in 2015.

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