According to free trade theory, countries will produce more of, and consume less of, a good for which they have a comparative advantage. According to Goldman, a continued escalation in trade tensions could put that dynamic at risk.
“Economic principles suggest that trade barriers will weigh on productivity in the longer term, as countries are forced to produce goods in which they have no comparative advantage,” the bank wrote. As a wide range of goods become more expensive because of tariffs, prices are likely to rise as well.
“The effects on inflation are clearer: The measures announced to date look set to push up U.S. core [personal consumption] inflation by around 0.1pp, and about twice that if the next round of China tariffs materializes,” Goldman estimated.
Global trade is coming off its highest growth rate in six years, according to the World Trade Organization, with world exports totaling nearly $18 trillion in goods and services during 2017.
Goldman data shows that growth has held up this year in spite of trade tensions, but that may not continue. Last week, Target admitted it was “deeply troubled” about how tariffs would affect consumers, and its bottom line, and more companies are getting nervous.
After the Trump administration’s announcement of new tariffs, China reportedly canceled high-level bilateral trade talks, according to a report in The Wall Street Journal. The White House did not respond to CNBC’s request for comment.
“As the U.S. continues to engage in the back and forth, tit-for-tat escalation of trade barriers and taxes, the mounting tensions have caused increased risk of harming U.S. businesses and consumers in the short term, the very same players the administration seeks to protect in the long run,” said Stifel chief economist Lindsey Piegza.
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