Now that the U.S. assault on global trade has kicked into high gear, there are questions about how it will impact the overall macroeconomic situations in the United States and its major trading partners. Thus far, there has been little economic data released covering the impact of new tariffs and potential upcoming ones. The new IMF World Economic Outlook report, however, sheds some light.
What Happened
On Oct. 9, the International Monetary Fund (IMF) released its latest World Economic Outlook update. The last update was released in July, before the United States began implementing its most significant tariffs against China and continued its threats to enact tariffs on the global auto sector.
The IMF has updated its model of economic growth expectations based on new data, such as the increase in global oil prices and all tariffs currently in place, including the round of tariffs covering $200 billion worth of Chinese goods that the United States implemented last month, as well as the U.S. plan to increase those tariffs from 10 to 25 percent at the start of 2019. The model does not factor in the future of the North America Free Trade Agreement, though that won't have a major impact now that the United States-Mexico-Canada Agreement (USMCA) has been signed.
The IMF's Baseline Scenario
Overall, the IMF's October expectations for 2018 and 2019 growth compared to its July and April updates have declined by 0.2 percent to 3.7 percent for both 2018 and 2019. The 2018 revisions for the United States and eurozone remain unchanged, though the IMF now anticipates a 0.2 percent decline for U.S. growth in 2019. The organization also predicts a 0.2 percent decline for China's growth in 2019.
Some of the regions with the largest downward revisions are emerging and developing Europe (which includes Turkey) – whose overall expected GDP growth rate for 2019 is 1.6 percent lower than the July outlook – the Middle East and North Africa, as well as Afghanistan and Pakistan. The latter two regions were both revised downward by 1.2 percent for 2019, mostly due to U.S. sanctions on Iran.
Building Out Additional Scenarios
The IMF also modeled four scenarios — each building on the one prior — to represent the future direction of global trade relations. The organization calls these models "layers of tariffs," adding additional potential forecasts to the baseline forecast modeled only on current tariffs.
According to the first scenario, if the United States implements $267 billion in tariffs on China, prompting Beijing to retaliate on an equivalent amount of U.S. exports in 2019, China's gross domestic product (GDP) in 2019 will decline by roughly 1 percent compared to the baseline scenario. U.S. GDP, meanwhile, would only decline by around 0.2 percent.
The second scenario examines what might happen if the United States also implements 25 percent tariffs on car and auto parts in 2019 and other countries retaliate. Such an event would have the biggest impact on Mexico and Canada, as their GDPs would plunge by an additional 1.2 percent by 2020 compared to the baseline scenario. The United States would also be hit hard in this scenario, suffering a 0.6 percent decline in GDP by 2020. The tariffs would have minimal impact on Europe and Asia. However, because of the USCMA, this scenario is unlikely.
The third and fourth scenarios add a 1 percent drop in investment in the United States and simulate a U.S. corporate earnings decline of as much as 15 percent. The potential events would impact corporate bond spreads and raise borrowing costs, while they could slow global GDP growth by 0.6 to 0.8 percent.
Why It Matters
The IMF's slowed global economic growth expectations are not the result of U.S. trade policy alone, but Washington's moves are extremely influential. Although it seems like there has been trade tension between the U.S. and China for ages, and their tariff threats have escalated significantly since July, actual tariffs have only been in effect for three months.
So far, there is almost no hard data reflecting their impact, leaving open questions about how the U.S.-China trade spat will affect global central bank policies. Markets anticipate an 80 percent implied probability that the U.S. Federal Reserve bank will hike the interest rate at the upcoming Federal Open Market Committee meeting in December.
