Bank of England governor Mark Carney today sent the US a forceful warning that increased tariffs will damage the economy, with estimated impact of as much as 2.5 percentage points knocked off global growth over three years.
In an ardent defence of the rules-based trade order, Carney warned US President Donald Trump that the US economy would be hardest hit by a trade war, although he delivered a more upbeat assessment of UK economic prospects.
Calculations by the central bank show the giant US economy could be tipped into recession: the models show GDP growth could be reduced by as much as 4.8 percentage points in a trade war scenario accompanied by tighter financial conditions, greater uncertainty, and the likelihood of lasting tariffs.
However, German chancellor Angela Merkel today raised hopes that a confrontation between the EU and the US can be avoided, saying that she backed cutting tariffs on American imports, although the EU would be limited by having to cut tariffs on imports from other countries as well.
"I would be ready to support negotiations on reducing tariffs, but we would not be able to do this only with the US," she said, according to Reuters.
Merkel’s comments came with the next wave of tariffs due to come into effect on Friday morning. The US will implement tariffs covering goods worth $34bn, with China poised to retaliate immediately.
The US is “opening fire” on the world with its threatened tariffs, China warned on Thursday, according to Reuters.
Chinese commerce ministry spokesman Gao Feng said: "If the US implements tariffs, they will actually be adding tariffs on companies from all countries, including Chinese and US companies".
“To put it simply, the US is opening fire on the entire world, including itself," he said, adding that China will not back down.
Trump started the trade disputes with the EU and China in an effort to lower the US’s current account deficit, which he sees as a key reason for job losses in America’s former industrial heartlands. Carney acknowledged that economists sometimes do not give enough attention to “the distributional consequences of rapid changes in technology and globalisation”, but said that resistance to the protectionism typified by Trump was one of the “unsung triumphs of the post-crisis period”.
Carney pointed to the uncertainty effects prompted by the de-globalisation effects of Brexit – which are intended to be only temporary – as an example of the impact that trade restrictions can have. UK GDP had grown by one percentage point less than the Bank of England had expected in the year until the end of the first quarter, with “material” affects from confidence.