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Trade uncertainty to trim $850 billion global output: Federal Reserve study

Reuters San Francisco | Updated on September 06, 2019 Published on September 06, 2019

Trade policy uncertainty driven by the Trump administration’s escalating dispute with China means hundreds of billions of dollars in lost US output and as much as $850 billion lost globally through early next year, according to a research published this week by the Federal Reserve.

The Fed researchers analysed newspaper articles and corporate earnings calls to estimate trade policy uncertainty, finding it has recently “shot up to levels not seen since the 1970s.”

Other economists, notably Stanford University professor Nicholas Bloom and his colleagues, have documented a similar rise in uncertainty.

The Fed researchers then estimated the blow such uncertainty delivers to economic activity, as businesses pull back on investment and production. They concluded that globally and in the US, its impact is around 1 per cent to GDP.

With US GDP estimated at about $20 trillion, and world GDP at about $85 trillion, a 1 per cent impact would put the drag from trade uncertainty at about $200 billion to US GDP, and $850 billion to global GDP, according to Reuters’ calculations.

The estimates, the researchers said, are uncertain.

But they are notable in that they are among the first to quantify the large impact of President Donald Trump’s approach to trade deals, which he says put the US economy at a global disadvantage.

In an effort to win better trade terms, the Trump administration has jacked up tariffs on hundreds of billions of dollars of Chinese imports and imposed or threatened to impose duties on imports from other trading partners, including Mexico and the EU. China and other countries in turn have threatened or imposed their own tariffs on US goods.

Trump has called on the Fed to slash U.S. interest rates to support the economy and offset the effects of the trade war.

Fed policymakers for their part have said they will not let politics dictate interest-rate policy. But they have consistently called out the tariffs as detrimental to US. Fed Chair Jerome Powell last month cited trade policy uncertainty as an important reason for the global economic slowdown and weak US manufacturing.

Chicago Fed President Charles Evans on Wednesday argued that increased trade tensions could slow US potential growth to 1.5 per cent a year, half what Trump said his administration would deliver.

Published on September 06, 2019
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