The global trade policy landscape is becoming increasingly aggressive, and if Donald Trump wins the upcoming presidential election, it could result in substantial tariffs on U.S. imports. This scenario could trigger retaliatory actions and escalate tensions, as highlighted by economists at Goldman Sachs.
Due to this, trade policy uncertainty indices have spiked to their highest levels since the 2018-2019 trade war.
“This rise in uncertainty poses a moderate downside risk to global growth, as companies might delay investments until the policy outlook becomes clearer,” economists noted.
Goldman Sachs quantifies this risk to investment and growth in three key ways:
Impact of Trade Uncertainty on Investment: During the 2018-2019 trade war, U.S. and European companies that mentioned trade uncertainty in their earnings calls significantly reduced their investments. At the peak of the trade war, such mentions correlated with a 0.5 percentage point decrease in year-over-year investment growth in the U.S. and a 1.3 percentage point decrease in the Euro area on a capital expenditure-weighted basis.
Public Companies and Trade Risk Exposure: Public companies perceived by the market as more exposed to trade risks—measured by equity returns during tariff announcement periods in the China-U.S. trade war—also reduced investments disproportionately. This was especially evident in the materials and industrials sectors. Regression estimates indicate that trade-war risks lowered year-over-year public-company investment growth by 0.3 percentage points in the U.S. and over 2 percentage points in the Euro area.
Cross-Country Evidence Pre-2018-2019 Trade War: Historical data suggests that a rise in the U.S. trade policy uncertainty index to its trade war peak level is associated with a 2 percentage point decline in year-ahead investment growth in major economies, with a larger 3 percentage point decline among major exporters.
Combining these three approaches, Goldman Sachs estimates that a rise in trade policy uncertainty comparable to the increase during the 2018-2019 trade war could reduce GDP growth by approximately 0.3 percentage points in the U.S. and 0.9 percentage points in the Euro area.
“Although a rise to 2018-2019 levels is not our base case, our analysis suggests that rising trade policy uncertainty poses a moderate downside risk to growth in the second half of 2024 and 2025, particularly in Europe,” Goldman Sachs economists concluded.
source : investing.com