A worldwide escalation of the trade tensions between the US and its major trading partners would have consequences for global trade equivalent to the 2008 financial crisis, the World Bank has warned.
Using conservative estimates to assess the risks to the world economy from rising economic nationalism of the kind promoted by Donald Trump, the Washington-based organisation warned of “severe consequences” for world trade and economic growth, with the harshest impact reserved for developing nations.
Under the scenario outlined in its latest global economic prospects report published on Tuesday, the bank found a broad-based increase in the use of import tariffs worldwide – to the maximum levels permitted by the World Trade Organisation – would trigger a decline in global trade amounting to 9%.
While that would be similar to the drop experienced during the financial crisis of 2008-09, it warned the impact could be even greater if countries went further than the WTO rules.
Franziska Ohnsorge, the lead author of the bank’s report, said: “The threat of trade protectionism is a real risk. Anything that puts sand in the wheels of global trade is a risk to global growth.”
The intervention by the bank, which was established alongside the International Monetary Fund after the second world war to reduce poverty in poor countries and to foster greater international collaboration and economic development, comes amid an increasingly bitter trade dispute between the US and its traditional allies.
The Trump administration last week imposed border tariffs on steel and aluminium imports from the European Union, Canada and Mexico, triggering angry responses and countermeasures, which could unravel decades of political consensus over the benefits of free trade.
Concerns also remain over an escalation of tensions between the US and China amid similar threats of protectionism from the White House and a promise of retaliation by Beijing.
The bank said the risks from a full-blown trade war would be worse for developing nations, because their fortunes are often linked to the strength of major nations’ economies. Ohnsorge said a 1% decline in growth in the US, China or the euro area could reduce growth in emerging economies over a year or two by up to 1.1%.
Without giving precise details for how much a full-scale economic conflict would lower world GDP, she said: “Trade has been an important source of euro area growth, Japanese growth and a lot of emerging market economies are very linked to that growth.”
At the same time as sounding the warning on trade, the World Bank maintained a forecast for steady global growth to persist this year and next, in a continuation of the favourable economic conditions that spread around the world last year. Global economic growth is forecast to remain robust at 3.1% in 2018, before slowing gradually.
However, it warned there were growing risks since its last assessment made in January. Alongside the threat posed by economic protectionism, the bank cited potential upsets from financial markets as central banks raise interest rates. There are also risks from high levels of debt in some countries, including China.
