Bank of England Governor: Comprehensive trade war will drag down global growth
Carney warned that the consequences of a comprehensive trade war far exceeded the direct economic impact of raising tariffs. He said that the Brexit has highlighted the damage that may be caused by increased uncertainty.
Updated on July 6, 2018 05:29 The Financial Times Delfina Strauss Report in London
The Governor of the Bank of England warned that a comprehensive trade war could significantly drag down global economic growth, far beyond the direct economic impact of raising tariffs.
The United States and China began to impose tariffs on each other – analysts feared that this could escalate into a broader trade war – on the eve of the speech. He said that the Brexit has highlighted the damage that may be caused by factors such as increased uncertainty.
He argues that the result is that if the United States and its trading partners increase tariffs by 10 percentage points, in the worst case, US output may slow down by 5% over three years.
“The experience of Brexit highlights that the greater the impact of business confidence, the more financial conditions are tightened. The most fundamental thing is that the more permanent expectations of the loss of openness, the greater the impact of global trade wars. ," Carney said.
According to estimates by the Bank of England, if the tariffs announced by the United States, the European Union, China, Canada and Mexico are in place, the average bilateral tariff will be doubled, and the average US tariff will be raised to the highest level in more than 50 years. The product exports from China to the US rose to 4.5%, and the products exported from EU rose to 6.2%.
Carney, who is also chairman of the international financial stability board, added that the direct impact of these measures is not large and is mainly limited to the countries directly involved.
But the Bank of England's model shows that if the tariff increase between the United States and all its trading partners reaches 10 percentage points, it is possible to reduce US output by 2.5% and global output by 1% through trade channels alone.
He added that if all countries raise tariffs on each other, then the impact on growth will be "will be much larger." If global business confidence declines, financial conditions tighten, and tariffs are considered permanent, then “it may be credible to double the output losses”. "On these issues, the UK's current experience in Brexit can provide some inspiration," Carney added. Although the UK will not withdraw from the EU until March next year, he argues that uncertainty about future trade relations has weakened UK business investment, while the squeezing of the pound against real income has hit consumers’ confidence.
As a result, the UK's economic growth is 2 percentage points lower than the Bank of England's forecast based on strong global background and fiscal policy.
He added that in the longer term, these losses will increase, because the loss of trade openness is likely to drag down productivity growth.
"As we know, the intention of Brexit is not to turn inward, but to expand openness over time," Carney said. He is referring to the British government's plan to reach a new trade agreement. “But for some time, Brexit will be an example of de-globalization, because the reduction in openness with the EU is unlikely to immediately compensate for new relationships of similar size with other trading partners.”