Remember when Raghuram Rajan rightly predicted that the mortgage-backed securities were too risky and could lead to a financial crisis and nobody paid attention. Well, a prediction has been made by Investment bank Macquarie too — Donald Trump’s trade war is going to boomerang on him and plunge the United States into a recession. Citing a research paper, Macquarie analysts have come to this conclusion that if this trade war escalates — which it seems to have –, with China and Mexico retaliating through reciprocal trade barriers, the one who would lose the most is the United States.
According to the to a research by Peterson Institute for International Economics (PIIE), which was released just before Donald Trump was elected as the President of the United States in 2016. The paper analysed three possible scenarios the of trade war and concluded that a full-blown war with China and Mexico will only bring recession in the US economy.
The paper written by PIIE economists Pedro Nicolaci da Costa and Eitan Urkowitz said: Reducing trade sharply will lead to severe, direct job losses in trade-related industries, which will then lead to indirect job losses in industries that produce intermediate goods for the affected industries. This, in turn, will lower US incomes, consumption, and investment, throwing the economy into a recession.
They said that there were three possible scenarios in the trade war — Full trade war, Aborted trader war, and Asymmetric trade war, each with their own levels of ripple effect. They found that under a full trade war and aborted trade scenario thousands of counties are affected throughout the country and hundreds of industries that are completely unrelated to trade are hit when China and Mexico retaliate in kind.
“We’re taking a snapshot of what happens when you hit the economy with a big hammer,” said Noland, PIIE’s executive vice president, adding that 2019 is at the trough of a policy-induced recession. Under Asymmetric trade war, the impact, while small, is still severe in some counties.
Trump on Friday outlined fresh tariffs on $50 billion of Chinese imports and directed Mnuchin to propose new investment restrictions on Chinese companies within 60 days to safeguard strategic technologies, Bloomberg report. Following Trump’s action, China vowed to protect the country from trade war and warned the US of its trade policies backfiring.