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USA economy to shrink up to 9.3% should Trump risk trade wars

The US economic output may contract up to 9.3 per cent, should it under new under president elect Donald Trump launch a trade war and will still lose if no other country retaliates, Germany’s Ifo institute for economic research said.

“Any trade war waged by the USA would backfire on the country,” Ifo said on Tuesday in an emailed statement, a week after US voters elected Trump, a misogynist and xenophobic businessman who promised to cancel trade agreements with his country’s trading partners.

“A trade war would have a significant negative impact on the USA” and will be accompanied by “major losses in prosperity,” Ifo said citing its director for international economics Gabriel Felbermayr.

“If the USA were to impose import duties of 45 per cent and non-tariff barriers of 15 per cent on all trade partners, and the latter were to retaliate in kind, US economic output would fall by up to 9.3 percent,” Felbermayer, who was commenting on a proposal tabled by Trump, was quoted as saying.

While in that scenario, the USA will become autarch, the impact on the German economy, the euro area’s largest, would be translated in output loss of €19bn or only 0.6 per cent of gross domestic product, he said adding that he considered the scenario to be unlikely.

“The aim of this exercise is more to provide ball-park figures and to make the perils of implementing a protectionist trade policy clear to all sides,” Felbermayr said.

For Canada and Mexico, the scenario would be “particularly negative” as their respective economies will lose €70bn and up to €57bn in output, or up to 4 per cent and 5 per cent respectively, Ifo said. The impact on China would be 1 per cent of gross domestic product or lower “thanks to China’s highly-diversified trade structure”.

“Trade and prosperity losses would be slightly lower if the USA were to levy 45 percent duties, but no other countries were to follow suit,” Ifo said. “In this case, however, US economic output would still drop by 6.63 per cent. Should the USA decide to only levy punitive tariffs on Mexico and China, this would even marginally benefit Germany, as such a policy would divert trade flows between both countries and the USA, with goods and services from Germany partially replacing lost imports from China or Mexico”.

The benefit for the German economy in that case would be less than 0.1 per cent, Ifo’s Feldbermayer said.

Over 1.5 million German jobs currently depend on trade with the USA, while 2.5 percent of German employment depends directly and indirectly on exports to the world’s largest economy, accounting to just over 1 million jobs, Ifo said. In addition, around 630,000 Germans work in companies that are managed by US firms.

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