Investors may still be underestimating the full risk to the global economy from a trade war, even after US stocks capped the worst month of the year. A recession could begin in as soon as nine months if President Donald Trump pushes to impose 25% tariffs on additional $300 billion of Chinese imports and
China retaliates with its own countermeasures, according to Chetan Ahya, chief economist and global head of economics at Morgan Stanley.
The rift between the Trump administration and China has escalated as each side blames the other for the breakdown in talks. Over the weekend, Trump celebrated his trade policies and the recent move to impose tariffs on Mexican goods in response to illegal immigration.
While stocks have declined, investors are still overlooking the impact the trade war will have on the global macroeconomic outlook, Ahya wrote in a note on Sunday. Growth will suffer as costs increase, customer demand slows and companies reduce capital spending, he said.
As the negative effects of the tariffs become more apparent, it may be too late for political action, according to Ahya. Policies to ease the impact are likely to be too reactive and slow to take effect.
Trump on Saturday defended his decisions to impose or raise levies against imports from Mexico and China, respectively, saying “companies are moving to the US” to avoid paying the levies, and that “TARIFF is a beautiful word indeed!”
The president tweeted that the US has been the “Piggy Bank” for other countries for years. “We are no longer the ‘fools’ of the past!” he said.
Trump had harsh words for Mexico again on Sunday morning, questioning the value of talks, days before a high-level delegation from Mexico is expected to meet with US officials.